SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
___X___ Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1997.
_______ Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______.
Commission File Number - 0-8041
GeoResources, Inc.
(Exact name of Registrant as specified in its charter)
Colorado 84-0505444
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1407 West Dakota Parkway, Suite 1-B 58801
Williston, North Dakota (Zip Code)
(Address of Principal executive offices)
(Registrant's telephone number including area code) (701) 572-2020
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $0.01
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. _X_
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The aggregate market value of the Common Stock (the only class of voting
stock) held by nonaffiliates of the Registrant as of March 20, 1998, was
approximately $5,328,806 (based on the closing price of the Registrant's
common stock on the NASDAQ system on such date.)
Shares of $0.01 par value Common Stock outstanding at March 20,
1998: 4,097,214
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Documents Incorporated By Reference - None
PART I.
ITEM 1. BUSINESS
General Development of Business
GeoResources, Inc. (the "Registrant" or the "Company") is a
natural resources company engaged principally in the following two
business segments: 1) oil and gas exploration, development and
production; and 2) mining of leonardite (oxidized lignite coal) and
manufacturing of leonardite based products which are sold primarily as
oil and gas drilling mud additives. The Registrant was incorporated
under Colorado law in 1958 and was originally engaged in uranium mining.
The Registrant built its first leonardite processing plant in 1964 in
Williston, North Dakota, and began participating in oil and gas
exploration and production in 1969. In 1982, the Registrant completed
construction of a larger leonardite processing plant in Williston that is
in use today. Financial information about the Registrant's two industry
segments is presented in Note B to the Financial Statements in Item 8 of
this report.
Information contained in this Form 10-K contains forward-
looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 which can be identified by the use of words
such as "may," "will," "expect," "anticipate," "estimate" or
"continue," or variations thereon or comparable terminology. In
addition, all statements other than statements of historical facts that
address activities, events or developments that the Company expects,
believes or anticipates, will or may occur in the future, and other such
matters, are forward-looking statements.
The future results of the Company may vary materially from
those anticipated by management and may be affected by various trends and
factors which are beyond the control of the Company. These risks include
the competitive environment in which the Company operates, changing oil
and gas prices, the demand for oil, gas and leonardite, availability of
drilling rigs, dependence upon key management personnel and other risks
described herein.
Oil and Gas Exploration, Development and Production
The Registrant's oil and gas exploration and production efforts
are concentrated on oil properties in the North Dakota and Montana
portions of the Williston Basin. The Registrant typically generates
prospects for its own exploitation, but when a prospect is deemed to have
substantial risk or cost, the Registrant may attempt to raise all or a
portion of the funds necessary for exploration or development through
farmouts, joint ventures, or other similar types of cost-sharing
arrangements. The amount of interest retained by the Registrant in a
cost-sharing arrangement varies widely and depends upon many factors,
including the exploratory costs and the risks involved.
In addition to originating its own prospects, the Registrant
occasionally participates in exploratory and development prospects
originated by other individuals and companies. The Registrant also
evaluates interests in various proved properties to acquire for further
operation and/or development.
The Registrant, where possible, supervises drilling and
production activities on new prospects and properties acquired. It does
not own or have any plans to acquire any rotary drilling equipment.
Hence, the Registrant uses independent drilling contractors for the
drilling of wells of which it is the operator. Thus, the Registrant's
drilling activities can be subject to delays caused by shortages of
drilling equipment or other factors beyond its control, including
inclement weather.
As of December 31, 1997, the Registrant had developed oil and
gas leases covering approximately 12,163 net acres in Montana and North
Dakota, and during 1997 sold an average 584 net equivalent barrels of oil
per day from 94 gross (66.80 net) producing wells located primarily in
North Dakota.
The Registrant sells its crude oil to purchasers with
facilities located near the Registrant's wells. The Registrant's gas
reserves are also contracted to purchasers in the area near the
Registrant's wells.
Mining and Manufacturing Leonardite Products
The Registrant operates a leonardite mine and processing plant
in Williston, North Dakota. Leonardite is mined from leased reserves and
processed to make a basic product that can be sold as is, or blended with
other substances to make several different dry, free flowing powders
primarily for the oil well drilling mud industry. Leonardite products
act as a dispersant or thinner, and provide filtration control when used
as an additive in drilling muds. Leonardite is also sold by the
Registrant for use in metal working foundries and in agricultural
applications.
In 1997, the Company's leonardite products were sold primarily
to drilling mud companies located in coastal areas of the Gulf of Mexico.
Demand for the plant's output is governed mainly by the level of oil and
gas drilling activities, particularly in the gulf coast area, both
onshore and offshore. Drilling activity declined substantially in the
mid 1980's and has remained at relatively low levels for the past several
years. The Registrant has no significant supply contracts with
individual customers.
Status of Products, Services or Industry Segments in Development
The Company owns 82% of the stock of Belmont Natural Resource
Company, Inc. (BNRC), a Washington corporation formed for the purpose of
exploiting natural gas opportunities in the Pacific Northwest. BNRC owns
oil and gas leases covering 6,713 gross acres (6,479 net) on a gas
prospect located in the State of Washington. Activities in 1997
consisted of a small amount of geological field work in an effort to
further define the prospect. The Company does not expect to devote any
substantial resources to this project in 1998.
In addition to its two principal business segments, the
Registrant owns a nonproducing silver property in Arizona. (See Item 2.)
The Company also owns a minor amount of geothermal and other mineral
rights located in Oregon. The Registrant does not expect to devote any
substantial resources to hard mineral or geothermal exploration or
development in 1998.
Sources and Availability of Raw Materials and Leases
Maintaining sufficient leasehold mineral interests for oil and
gas exploration and development is a primary continuing need in the oil
and gas business. Management believes that the Company's current
undeveloped acreage is sufficient to meet its presently foreseeable oil
and gas leasehold needs. Maintaining sufficient leasehold mineral
interests for leonardite mining is also a continuing need for the
Registrant's mining and manufacturing of leonardite products. Management
believes the leonardite held under current leases is sufficient to
maintain the present output for many years. (See Item 2.)
Major Customers
In 1997, Registrant sold its crude oil to 20 purchasers. Koch
Oil Company was the major customer, accounting for approximately 86% of
the Registrant's oil and gas revenue in 1997 or approximately 71% of the
Registrant's total operating revenue. Management believes there are
other crude oil purchasers to whom the Company would be able to sell its
oil if it lost any of its current customers.
In 1997, the Registrant sold leonardite products to 43
customers. The largest customer in 1997 for leonardite products made
purchases totaling 17% of the Registrant's mining and manufacturing
revenue or approximately 3% of the Registrant's total operating revenue.
Backlog Orders, Research and Development
The Registrant does not have any material long-term or short-
term contracts to supply leonardite products. All orders are reasonably
expected to be filled within three weeks of receipt. From time to time,
the Registrant enters into short-term contracts to deliver quantities of
oil or gas; however, no significant backlog exists. The Company's oil
and gas division order contracts and off lease marketing arrangements are
typical of those in the industry with 30 to 90 day cancellation notice
provisions and generally do not require long-term delivery of fixed
quantities of oil or gas. In December 1997, the Company entered into a
Volumetric Production Payment with Koch Producer Services, Inc., to
deliver 75 barrels of oil per day to Koch from one of the Company's
properties. This agreement provides for delivery of fixed quantities of
oil for one year. The Registrant has not spent any material time or
funds on research and development, and does not expect to do so in the
foreseeable future.
Competition
Oil and Gas In addition to being highly speculative, the oil
and gas business is intensely competitive among the many independent
operators and major oil companies in the industry. Many competitors
possess financial resources and technical facilities greater than those
available to the Registrant and may, therefore, be able to pay more for
desirable properties or to find more potentially productive prospects.
However, management believes the Registrant has the ability to obtain
leasehold interests which will be sufficient to meet its oil and gas
needs in the foreseeable future.
Leonardite Products Uses and specifications of leonardite-
based drilling mud additives are subject to change if better products are
found. The Registrant's products compete with leonardite and non-
leonardite products used as additives in numerous types of drilling mud.
In addition, leonardite deposits are available in other areas within the
United States and competitors may be able to enter the leonardite
business with relative ease. At the present time, similar products are
marketed by other companies who mine, process and market leonardite
products. Competition lies primarily in delivery time, transportation
costs, quality of the product, performance of the product when used in
drilling mud and access to high-quality leonardite.
Environmental Regulations
All of the Registrant's operations are generally subject to
federal, state or local environmental regulations. The Registrant's oil
and gas business segment is affected particularly by those environmental
regulations concerned with the disposal of produced oilfield brines and
other oil-related wastes. The Registrant's leonardite mining and
processing segment is also subject to numerous state and federal
environmental regulations, particularly those concerned with air
contaminant emission levels of the Company's processing plant, and mine
permit and reclamation regulations pertaining to surface mining at the
Company's leonardite mine. The Company believes that maintenance of
acceptable air contaminant emission levels at its processing plant could
become more costly in the future if plant production increases
substantially above 1997 levels. Management believes significantly
higher plant utilization would increase emission levels and could make it
necessary to replace or upgrade air quality control equipment. Future
environmental compliance costs that might be required to upgrade the
equipment are not known at this time.
Foreign Operations and Export Sales
The Registrant has no production facilities or operations in
foreign countries and has no direct export sales. Some of the Company's
leonardite products are sold to distributors in the United States who in
turn export these products.
Employees
As of March 15, 1998, the Registrant had 13 full-time employees.
ITEM 2. PROPERTIES
The Registrant's properties consist of four main categories:
Office, leonardite plant and mine, oil and gas, and a nonproducing silver
property. Certain of these properties are mortgaged to the Company's
bank. See Note F to the Financial Statements for further information.
Office
The Registrant owns a 17,500 square foot office building which
is located on a one-acre lot in Williston, North Dakota. The Company
utilizes approximately 5,000 square feet of the building and rents the
remainder to unaffiliated businesses.
Leonardite Plant and Mine
The site of the Registrant's leonardite plant covers
approximately nine acres located one mile east of Williston in Williams
County, North Dakota. This site and an additional 20 acres of
undeveloped property are owned by the Company. The plant has
approximately 11,500 square feet of floor area consisting of warehousing
and processing space. Therein is equipment able to process and ship
approximately 3,000 tons of leonardite products per month. Finished
product leonardite sales for the past three years are shown below.
Finished Average
Products Sales Price
Year (Tons) Per Ton
1997 8,094 $ 94.44
1996 8,909 $ 94.49
1995 7,528 $ 93.51
The Registrant's leonardite mining properties consist of a
developed lease from private parties and one undeveloped lease from the
United States Department of the Interior, Bureau of Land Management. The
leased land is located about one mile from the plant site in Williams
County, North Dakota. The private-party (fee) lease totals approximately
160 acres. The federal lease from the Bureau of Land Management (BLM)
covers 160 undeveloped acres. In 1994, the Company formed a 240-acre
logical mining unit (LMU), in accordance with BLM regulations, consisting
of 80 acres of the fee lease and 160 acres of the BLM lease. This LMU
allows current operations on the fee lease to satisfy diligent
development and other requirements for 160 acres of the BLM lease.
Management believes the leonardite contained in the 240-acre LMU is
sufficient to supply its plant's raw material requirements for many years
and that before these reserves were exhausted, the Company would be able
to acquire other fee or federal coal leases in the same area.
Oil and Gas Properties
The Registrant owns developed oil and gas leases totaling
16,680 gross (12,163 net) acres as of March 15, 1998, plus associated
production equipment and also owns a number of undeveloped oil and gas
leases. The acreage and other additional information concerning the
Registrant's oil and gas operations are presented in the following
tables.
Estimated Net Quantities of Oil and Gas and Standardized
Measure of Future Net Cash Flows All the Registrant's oil and gas
reserves are located in the United States. Information concerning the
estimated net quantities of all the Registrant's proved reserves and the
standardized measure of future net cash flows from such reserves is
presented as unaudited supplementary information following the Financial
Statements in Item 8. The estimates are based upon the report of
Broschat Engineering and Management Services, an independent petroleum-
engineering firm in Williston, North Dakota. The Registrant has no long-
term supply or similar agreements with foreign governments or
authorities, and the Registrant does not own an interest in any reserves
accounted for by the equity method.
Net Oil and Gas Production, Average Price and Average
Production Cost The net quantities of oil and gas produced and sold for
each of the last three fiscal years, the average sales price per unit
sold and the average production cost per unit are presented below.
Oil & Gas
Average Average
Net Net Net Oil Gas Average
Oil Gas Oil & Gas Sales Sales Prod.
Prod. Prod. Prod. Price Price Cost Per
Year (Bbls) (MCF) (BOE)* Per Bbl Per MCF BOE**
1997 211,266 10,408 213,001 $16.15 $ 1.30 $ 6.27
1996 166,810 13,167 169,005 $17.67 $ 1.29 $ 6.40
1995 151,467 13,061 153,644 $14.24 $ 0.98 $ 6.18
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*Barrels of oil equivalent have been calculated on the basis of six
thousand cubic feet (6 MCF) of natural gas equal to one barrel of oil
equivalent (1 BOE).
**Average production cost includes lifting costs, remedial workover
expenses and production taxes.
Gross and Net Productive Wells As of March 15, 1998, the
Registrant's total gross and net productive wells were as follows:
Productive Wells*
Oil Gas
Gross Wells Net Wells Gross Wells Net Wells
96 67.78 24 24.00
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*There are no wells with multiple completions. A gross well is a well in
which a working interest is owned. The number of net wells represents
the sum of fractional working interests the Company owns in gross wells.
Productive wells are producing wells plus shut-in wells the Company deems
capable of production.
Gross and Net Developed and Undeveloped Acres As of March 15,
1998, the Registrant had total gross and net developed and undeveloped
oil and gas leasehold acres as set forth below. The developed acreage is
stated on the basis of spacing units designated by state regulatory
authorities.
Leasehold Acreage*
Developed Undeveloped Total
Gross Net Gross Net Gross Net
Montana 9,000 7,627 17,377 17,312 26,377 24,939
North Dakota 7,680 4,536 30,842 11,029 38,522 15,565
Washington 0 0 6,713 6,479 6,713 6,479
ALL STATES 16,680 12,163 54,932 34,820 71,612 46,983
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*Gross acres are those acres in which a working interest is owned. The
number of net acres represents the sum of fractional working interests
the Company owns in gross acres.
Exploratory Wells and Development Wells For each of the last
three fiscal years ended December 31, the number of net exploratory and
development productive and dry wells drilled by the Company was as set
forth below.
Net Exploratory Net Development Total Net
Year Wells Drilled Wells Drilled Wells Drilled
Productive Dry Productive Dry
1997 0.00 0.02 1.67 0.00 1.69
1996 0.00 0.08 0.67 0.00 0.75
1995 0.00 0.00 1.34 0.00 1.34
Present Activities From January 1, 1998 to March 15, 1998, the
Registrant had one gross (.67 net) horizontal well in the process of
drilling. This well was completed and put on production prior to March
15, 1998, and it is therefore included in the previous table titled
"Gross and Net Productive Wells".
Supply Contracts or Agreements The Registrant is not obligated
to provide a fixed or determinable quantity of oil and gas in the future
under any existing contract or agreement, beyond the short term contracts
customary in division orders and off lease marketing arrangements within
the industry.
Reserve Estimates Filed with Agencies No estimates of total
proved net oil and gas reserves for the year ended December 31, 1997 have
been filed with any federal authority or agency. Other than the
estimates of reserves at December 31, 1996, filed with the Securities and
Exchange Commission, the Registrant did not file reserve reports with any
other federal agencies within the past 12 months.
Silver Property
The Registrant owns seven patented mining claims and 15
unpatented mining claims in Pinal County, Arizona. These claims, known
as the Reymert Silver Property, have produced silver sporadically since
the 1880's. The property's last ore production was in 1989 under a lease
arrangement. In 1993, the Registrant entered into a License Agreement
with another company to allow commercial rock production from the
patented claims. The Registrant receives a royalty of $2 per ton for
rock severed from the property. No commercial rock production occurred
in 1997. No mining activities are presently being conducted on this
property. Management has no plans to devote significant financial
resources to this property in 1998; however, it continues to investigate
ways to further exploit the property.
ITEM 3. LEGAL PROCEEDINGS
On May 12, 1989, the Company filed an action in Burleigh County
District Court, North Dakota, against MDU Resources Group, Inc., a
Delaware corporation, and Williston Basin Interstate Pipeline Company, a
Delaware corporation. The Complaint related to, among other things,
breaches of a take or pay natural gas contract and attempts by the
defendants to coerce the Company into modifying the contract. The
defendants answered the Complaint on June 1, 1989. Afterwards, no
further materials were filed with the court, but the Company believed
that the case remained pending. The Company contacted the attorney who
filed the action to assess the status and request further prosecution of
the case. After several months of inaction regarding the case, the
Company contacted the court in September 1996 and was informed by the
court that the case had been dismissed in 1991. On January 15, 1997, the
Company refiled its action against MDU Resources Group, Inc. Management
cannot predict the outcome of this action, although the Company intends
to pursue its available remedies.
Other than the foregoing legal proceeding, the Company is not a
party, nor is any of its property subject to, any pending material legal
proceedings. The Company knows of no legal proceedings contemplated or
threatened against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, no matter was submitted to a
vote of security holders of the Company through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant's Common Stock trades on the Nasdaq SmallCap
Stock Market under the Symbol "GEOI." The following table sets forth
for the period indicated the lowest and highest trade prices for the
Registrant's Common Stock as reported by the Nasdaq SmallCap Stock
Market. These trade prices may represent prices between dealers and do
not include retail markups, markdowns or commissions.
Trade Price
Calendar Lowest Highest
1996 1st Quarter $1.25 $1.63
2nd Quarter $1.44 $2.06
3rd Quarter $1.38 $1.88
4th Quarter $1.50 $4.38
1997 1st Quarter $3.04 $3.21
2nd Quarter $2.83 $2.98
3rd Quarter $3.39 $3.61
4th Quarter $2.52 $2.65
As of March 15, 1998, there were approximately 1,300 holders of
record of the Registrant's Common Stock. Management believes that there
are also approximately 750 additional beneficial owners of common stock
held in "street name".
The Registrant has never declared or paid a cash dividend on
its Common Stock nor does it anticipate that dividends will be paid in
the near future. Further, certain of the Company's financing agreements
restrict the payment of cash dividends. See Note F to the Financial
Statements for further information.
ITEM 6. SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
Operating
Revenue $ 4,189,793 $ 3,806,790 $ 2,874,001 $ 2,442,850 $ 2,375,150
Income (Loss)
Before Cumula-
tive Effect
of Accounting
Change $ 766,265 $ 733,726 $ 303,889 $ 40,141 $(1,654,090)
Net Income
(Loss) $ 766,265 $ 733,726 $ 303,889 $ 40,141 $(1,077,090)
Income (Loss)
Per Share From
Continuing
Operations $ .19 $ .18 $ . 08 $ .01 $ (.41)
Net Income
(Loss)
Per Share $ .19 $ . 18 $ . 08 $ .01 $ (.27)
AT YEAR END:
Total Assets $ 8,032,328 $ 7,909,965 $ 6,690,285 $ 5,796,354 $ 5,856,396
Long-term
Debt $ 666,000 $ 998,097 $ 958,330 $ 787,035 $ 1,019,792
Current
Maturities $ 457,097 $ 283,200 $ 511,594 $ 385,219 $ 371,677
Working
Capital $ 18,240 $ 205,463 $ (171,949) $ (86,786) $ 149,646
(Deficit)
Stockholders'
Equity $ 5,691,597 $ 4,873,927 $ 4,114,001 $ 3,798,549 $ 3,758,408
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company operates through two primary segments: 1) oil and
gas exploration and production; and 2) leonardite mining and processing
wherein the Company's major products are oil and gas drilling mud
additives. Each of the Company's segments is discussed herein.
BUSINESS ENVIRONMENT AND RISK FACTORS
The following discussion should be read in conjunction with the
Company's consolidated financial statements and related notes included
elsewhere herein. The Company's future operating results may be affected
by various trends and factors which are beyond the Company's control.
These include, among other factors, the competitive environment in which
the Company operates, oil and gas prices, demand for oil, gas and
leonardite, availability of drilling rigs, dependence upon key management
personnel, and other uncertain business conditions that may affect the
Company's business.
With the exception of historical information, the matters
discussed below under the headings "Results of Operations" and
"Liquidity and Capital Resources" may include forward-looking
statements that involve risks and uncertainties. The Company cautions
the reader that a number of important factors discussed herein, and in
other reports filed with the Securities and Exchange Commission, could
affect the Company's actual results and cause actual results to differ
materially from those discussed in forward-looking statements.
RESULTS OF OPERATIONS
Comparison of 1997 to 1996 Revenue and Gross Margin
Oil and gas sales were $3,425,000 in 1997 compared to
$2,965,000 in 1996, an increase of $460,000 or 16%. This increase in
revenue was due to a 9% decrease in average oil prices and a 26% increase
in the volume of oil and gas sold. The 1997 average oil price per barrel
was $16.15 compared to an average of $17.67 in 1996. The Company
periodically uses various New York Mercantile Exchange (NYMEX) crude oil
and energy products contracts and options to hedge against the risks of
oil price declines. See Note K to the Financial Statements for further
information. The volume of oil and gas sold in 1997 increased to 213,000
barrels of oil equivalent (BOE) from 169,000 BOE in 1996. The lower 1997
average oil price resulted from moderately lower world oil prices that
existed during 1997. The higher 1997 production volumes resulted from
production contributed by horizontal wells the Company has drilled in
recent years. The horizontal well that had the largest impact on
production in 1997 compared to 1996 was the Oscar Fossum H3 that began
production in December 1996.
Oil and gas production costs were $1,336,000 in 1997 compared
to $1,082,000 in 1996, an increase of $254,000 or 23%. About two-thirds
of the increase resulted from two factors, the first being the Company's
increased workover activity in 1997, and the second, increased repairs
and maintenance on the Company's oil and gas production facilities. For
many years before the Company drilled its first horizontal well in 1995,
cash flow was substantially lower, and therefore, non-essential repairs
and maintenance of production equipment were often deferred in order to
minimize production expense and conserve cash flow. During 1997, with
substantially more cash flow available, the Company performed many
repairs and maintenance on production equipment in an effort to improve
their operating condition and efficiency. The remaining one-third of the
increase in oil and gas production costs was due to smaller increases in
many expense categories due to either increased costs of goods or the
Company's increased production levels. For example, production taxes
increased $13,000 due to the higher oil sales, electrical power increased
$35,000 due to more wells using power, and contract pumping services
increased $26,000 due to a rate increase and more wells. Even with these
higher production costs, however, production costs expressed on a per-
equivalent-barrel basis remained relatively stable, averaging $6.27 for
1997 compared to $6.40 for 1996. The stability in per barrel costs was
due to increased production which spread the costs over more barrels.
Gross margin for 1997 oil and gas operations before deductions for
depletion and selling, general and administrative expenses increased to
$2,090,000, or 61% of revenue, compared to $1,883,000, or 63% of revenue,
for 1996. The stability in 1997 gross margin as a percentage of revenue
was due to oil revenues increasing the same percentage as production
costs.
Leonardite product sales were $764,000 in 1997 compared to
$842,000 in 1996, a decrease of $77,000, or 9%. This decrease was due to
a 9% decrease in tonnage sold in 1997 resulting from weaker demand for
the Company's products in the fourth quarter of 1997. Production sold in
1997 was 8,094 tons at an average price of $94.44, compared to 8,909 tons
at an average price of $94.49 for 1996.
Cost of leonardite sold was $598,000 in 1997 compared to
$667,000 in 1996, a decrease of $70,000 or 10%. This decrease resulted
from the 9% decrease in 1997 tonnage sold. Production costs per ton were
$73.86 and $74.92 for 1997 and 1996, respectively. Costs per ton were
essentially stable for 1997 compared to 1996 and varied only slightly due
to the ratio of basic products and specialty products processed in 1997
and 1996.
Gross margin for 1997 leonardite operations before deductions
for depreciation and selling, general and administrative expenses was
$167,000, or 22% of revenue, compared to $174,000, or 21% of revenue, for
1996. The relative stability in 1997 gross margin resulted from
relatively equal declines in leonardite production costs compared to
leonardite sales.
Comparison of 1997 to 1996 Consolidated Analysis
Total revenue for 1997 increased $383,000, or 10%, to
$4,190,000 from $3,807,000 in 1996. This increase was due to the higher
oil and gas production previously discussed.
Total operating costs for 1997 increased $310,000 or 11%, to
$3,233,000 compared to $2,923,000 in 1996. These increased costs
resulted from the higher oil and gas production costs previously
discussed coupled with higher depreciation, depletion and amortization
(DD&A) expenses. DD&A expenses were higher due to higher oil production
levels that increased the oil depletion expense portion of DD&A.
Higher 1997 total revenue, and to a lesser extent higher total
operating costs, resulted in operating income of $957,000 for 1997
compared to $883,000 in 1996. Nonoperating expenses increased $16,000
from $64,000 in 1996 to $80,000 in 1997, yielding an income before taxes
of $876,000 in 1997 compared to $819,000 in 1996.
Income tax expense in 1997 was $110,000 compared to $86,000 in
1996. The expense amount for each year is reflective of the net changes
in the Company's deferred-tax assets and deferred-tax liabilities under
the provisions of SFAS No. 109 and include only a small amount of income
taxes currently paid. See Notes A and G to the Financial Statements for
further information.
Net income for 1997 was $766,000 or 19 cents per share compared
to a net income of $734,000 or 18 cents per share in 1996.
Comparison of 1996 to 1995 Revenue and Gross Margin
Oil and gas sales were $2,965,000 in 1996 compared to
$2,170,000 in 1995, an increase of $795,000 or 37%. This increase in
revenue was due to a 24% increase in average oil prices and a 10%
increase in the volume of oil and gas sold. The 1996 average oil price
was $17.67 compared to an average of $14.24 in 1995. The Company
periodically uses various New York Mercantile Exchange (NYMEX) crude oil
and energy products contracts and options to hedge the risks of oil price
declines. See Note K to the Financial Statements for further
information. The volume of oil and gas sold in 1996 increased to 169,000
BOE (Barrels of Oil Equivalent) from 154,000 BOE in 1995. The higher
1996 average oil price resulted from substantially higher world oil
markets that existed during 1996. The higher 1996 production volumes
resulted entirely from production contributed by the Company's Oscar
Fossum H2 horizontal well (.67 net) that began production in December
1995.
Oil and gas production costs were $1,082,000 in 1996 compared
to $950,000 in 1995, an increase of 14%. This $132,000 increase was
caused by a $46,000 increase in production taxes resulting from higher
oil prices, a $44,000 increase related to increased workover activity and
a $42,000 increase in winter-related costs including snow removal and
increased prices of propane fuel for oil treating facilities. Production
costs on a per equivalent barrel basis however, remained relatively
stable averaging $6.40 for 1996 compared to $6.18 for 1995. The
stability in per barrel costs was due to increased production which
spread the costs over more barrels. Gross margin for 1996 oil and gas
operations before deductions for depletion and selling, general and
administrative expenses was $1,883,000, or 63% of revenue, compared to
$1,220,000, or 56% of revenue, for 1995. The increase in 1996 gross
margin was primarily due to higher 1996 oil prices previously discussed.
Leonardite product sales were $842,000 in 1996 compared to
$704,000 in 1995, an increase of $138,000, or 20%. This increase was
primarily due to an 18% increase in products sold resulting from
increased demand for drilling mud additives associated with increased oil
and gas drilling in the United States. Production sold in 1996 was 8,909
tons at an average price of $94.49, compared to 7,528 tons at an average
price of $93.51 for 1995. Variations in the average per ton prices were
normal fluctuations associated with the ratio of basic products and
specialty products sold during 1996 and 1995.
Cost of leonardite sold was $667,000 in 1996 compared to
$560,000 in 1995, an increase of $108,000 or 19%. This increase resulted
from the 18% increase in 1996 production. Production costs per ton were
$74.92 and $74.34 for 1996 and 1995, respectively. Costs per ton were
essentially stable for 1996 compared to 1995 and varied only slightly due
to the ratio of basic products and specialty products processed in 1995
and 1996.
Gross margin for 1996 leonardite operations before deductions
for depreciation and selling, general and administrative expenses was
$174,000, or 21% of revenue, compared to $144,000, or 20% of revenue, for
1995. The increase in 1996 gross margin was primarily due to the higher
product sales previously discussed.
Comparison of 1996 to 1995 Consolidated Analysis
Total revenue for 1996 increased $933,000, or 32%, to
$3,807,000 from $2,874,000 in 1995. This increase was due to the higher
oil and gas production and prices and increased leonardite product sales
previously discussed.
Total operating costs for 1996 increased $471,000 or 19%, to
$2,923,000 compared to $2,453,000 in 1995. These increased costs
resulted from the higher oil and gas and leonardite production cost
previously discussed coupled with higher depreciation, depletion and
amortization (DD&A) and selling, general and administrative (SG&A)
expenses. SG&A expenses were higher due to increased costs for corporate
publicity, shareholder communications and general increases in office
activity. SG&A expenses also increased due to the Company's contribution
to its employees' profit sharing plan that was $25,000 higher than the
prior year and a non-cash expense incurred in 1996 related to a one time
stock grant upon the retirement of an employee. DD&A expenses were
higher due to higher oil production levels that increased oil depletion
expense.
Higher 1996 total revenue, and to a lesser extent higher total
operating costs, resulted in operating income of $883,000 for 1996.
Nonoperating expenses decreased $25,000 from $90,000 in 1995 to $64,000
in 1996, yielding an income before taxes of $819,000 in 1996 compared to
$332,000 in 1995.
Income tax expense in 1996 was $86,000 compared to $28,000 in
1995. The expense amount for each year is reflective of the net changes
in the Company's deferred tax assets and deferred tax liabilities under
the provisions of SFAS No. 109 and include only a small amount of income
taxes currently paid. See Notes A and G to the Financial Statements for
further information.
Net income for 1996 was $734,000 or 18 cents per share compared
to a net income of $304,000 or 8 cents per share in 1995.
LIQUIDITY AND CAPITAL RESOURCES.
At December 31, 1997, the Company had current assets of
$1,358,000 compared to current liabilities of $1,340,000 for a current
ratio of 1.01 to 1 and working capital of $18,000. This compares to a
current ratio of 1.11 to 1 at December 31, 1996 and working capital of
$205,000. The lower working capital for 1997 was primarily due to lower
oil and gas receivables from lower year-end 1997 oil prices and the
Company continuing to use cash and cash flow to drill additional
horizontal wells.
During the year ended December 31, 1997, the Company generated
cash flows from operating activities of $2,228,000 which is $1,077,000
greater than the amount generated during 1996. This increase was due in
a large part to increased oil production in 1997 coupled with other
changes to current assets and liabilities. During the second quarter of
1997, the Company drilled the Ballantyne-State/Steinhaus H1 (BSS H1)
horizontal well (1 gross, 1.0 net) in the Wayne Field, Bottineau County,
ND; and the Company spudded a second horizontal well in the same field,
the Oscar Fossum H4 (1 gross, .67 net) just before year-end 1997. The
Oscar Fossum H4 was drilled and completed successfully, and was put on
production in February 1998. The Company anticipates that cash flows
from operations and funds available under a new 1997 $3,000,000 revolving
line of credit will be sufficient to meet its short-term cash
requirements. This new line of credit replaces the Company's prior 1995
line of credit and contains terms substantially the same as the 1995
line. It allows borrowings until January 5, 2001 with repayment of any
amounts borrowed to begin by that date. The Company can select a
repayment schedule of up to a maximum of 48 months.
During 1997, the Company's investing activities used $2,707,000
of cash which was primarily for additions to property, plant and
equipment. The additions to property and equipment consists of the
approximate amounts as follows: Exploration and development costs of
$2,553,000 that included the paid portion of costs for drilling and
completing the Oscar Fossum H3 in late 1996 and the BSS H1 in mid-1997,
proved property acquisition costs of $29,000 that included the cost of
acquiring some small interests in several producing wells, unproved property
costs of $55,000 primarily for oil and gas lease costs, delay rental costs
of $27,000 and improvements to the Company's leonardite plant of $43,000.
During 1997, the Company's financing activities also utilized
$583,000 of cash for principal payments on long-term debt agreements.
This amount consisted of $283,200 of regularly scheduled debt maturities
for 1997 plus $300,000 that was paid down prior to terming out the
Company's 1995 revolving line of credit in December 1997 and replacing it
with the new 1997 $3,000,000 revolving line of credit discussed above.
The sources of cash in 1997 for the investing and financing
activities discussed above were the cash flows provided by operating
activities, $425,000 of borrowings on the Company's 1995 revolving line
of credit and a Volumetric Production Payment (VPP) with Koch Producer
Services, Inc., that forward sold 27,375 barrels of oil from one of the
Company's properties and provided the Company with cash of $364,550. A
$300,000 portion of the VPP cash was then applied to partially pay down
the 1995 revolving line of credit before terming it out as discussed
above. The VPP agreement started December 1, 1997 and ends November 30,
1998. During that time, the Company's production is reduced by the 75
barrels of oil per day that is being delivered to Koch under the terms of
the forward sale.
Management estimates that the Company could incur development
costs in 1998 in the range of $1,000,000 related to the Company's proved
developed nonproducing and proved undeveloped oil and gas properties.
Other planned expenditures for 1998 consist of delay rentals and other
exploration costs of approximately $100,000. Capital expected to be used
for 1998 principal payments required under existing debt agreements
totals $457,000. The estimated amounts for exploration and development
are uncertain because of the extremely low oil prices that exist as of
March 1998. During March 1998, crude oil prices on the NYMEX have
both declined to their lowest levels in nearly 10 years and then also
regained nearly 25% of their value. These dramatic fluctuations are
caused by the market's perception of what major oil producing countries
will do to reduce oil production. The price the Company receives
for its oil production is tied directly to world oil markets, and lower
prices will reduce cash flow. The Company budgets and estimates its
capital expenditures, but these estimates can change, either upward or
downward, very quickly with the effects oil prices have on cash flow.
Management expects to continue to evaluate possible future
purchases of additional producing oil and gas properties and the further
development of currently owned properties. Management believes the
Company's long-term cash requirements for such investing activities and
the repayment of long-term debt can be met by the continued future cash
flows from operations, and, if necessary, possible forward sales of oil
reserves or additional debt or equity financing.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements and Supplementary
Data" on page 25.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information concerning each
director and executive officer of the Company:
Position(s) with Period of Service as
Name and Age the Company a Director or Officer
Jeffrey P. Vickers President and Since 1982
Age: 45 Director
Thomas F. Neubauer Vice President Since June 1992
Age: 63 of Leonardite
Operations
Cathy Kruse Secretary, Since October 1981;
Age: 43 Treasurer and October 1981 to May
Director 1985 and since June 1990;
since June 1996
H. Dennis Hoffelt Director From 1967 through June
Age: 57 1986; and since June 1987
Joseph V. Montalban Director Since June 1996
Age: 74
Paul A. Krile Director Since June 1997
Age: 70
All of the directors' terms expire at the next annual meeting
of shareholders or when their successors have been elected and qualified.
The executive officers of the Company serve at the discretion of the
Board of Directors.
Jeffrey P. Vickers received a Bachelor of Science degree in
Geological Engineering with a Petroleum Engineering option from the
University of North Dakota in 1978. Prior to obtaining his degree, Mr.
Vickers served two years overseas with the U.S. Army. In 1979, Mr.
Vickers joined Amerada Hess Corporation as an Associate Petroleum
Engineer in the Williston Basin. In 1981, Mr. Vickers was employed by
the Company as the Drilling and Production Manager where he was
responsible for providing technical assistance and supervision of
drilling and production operations and generated development drilling
programs. He became President of the Company on January 1, 1983. In
June 1982, Mr. Vickers became a director of the Company.
Thomas F. Neubauer is Vice President of Leonardite Operations
and plant manager of the Company. Mr. Neubauer has been employed by the
Company since July 1965.
Cathy Kruse is Secretary, Treasurer and business office
manager of the Company. Ms. Kruse graduated from the Atlanta College of
Business in 1977 and was employed as a Legal Assistant for four years
prior to her employment with the Company in May 1981. In June, 1996, Ms.
Kruse became a director of the Company.
H. Dennis Hoffelt has been President of Triangle Electric
Inc., Williston, North Dakota, an electrical contracting firm, for over
the past five years. He served as a director of the Company from 1967
through June of 1986 and was elected as a director again in 1987.
Joseph V. Montalban has been a director of the Company since
June 1996. He is a petroleum engineering consultant and was the founder
of Mountain States Resources, Inc. and Monte Grande Exploration Ltd., the
companies that merged to create MSR Exploration Ltd. He held various
offices on the MSR Board until his resignation in 1994. Mr. Montalban is
the President and Chief Executive Officer of Montalban Oil & Gas
Operations, Inc.
Paul A. Krile has been a director of the Company since June
1997. He has been the President and owner of Ranco Fertiservice, a
manufacturer of dry fertilizer handling equipment, headquartered in Sioux
Rapids, Iowa for more than the last five years.
Cathy Kruse, Secretary and Treasurer of the Company, is the
sister-in-law of Jeffrey P. Vickers. No other family relationship exists
between or among any of the above named persons. There are no
arrangements or undertakings between any of the named directors and any
other persons pursuant to which any director was selected as a director
or was nominated as a director. Based solely upon a review of Forms 3, 4
and 5 furnished to the Company, no officer or director failed to file any
of the above forms on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
The following table presents the aggregate compensation which
was earned by the Chief Executive Officer for each of the past three
years. The Company does not have an employment contract with any of its
executive officers. With the exception of Jeffrey P. Vickers, no
employee of the Company earned total annual salary and bonus in excess of
$100,000. There has been no compensation awarded to, earned by or paid
to any employee required to be reported in any table or column in any
fiscal year covered by any table, other than what is set forth in the
following table.
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
All
Other Restricted Securities Other
Name and Annual Stock Underlying LTIP Compen-
Principal Salary Bonus Compen- Award(s) Options Payouts sation
Position Year ($) ($) sation ($) SARs(#) ($) ($)
Jeffrey 1997 $82,596 25,000 -0- N/A 71,000 N/A $8,747
P. 1996 $78,443 -0- -0- N/A -0- N/A $11,766
Vickers 1995 $74,659 -0- -0- $925 35,000 N/A $8,150
CEO
In the table above, the column titled "Restricted Stock
Awards" is comprised of a 1995 grant of 1,000 shares of common stock
from the Registrant to each full-time employee, including Jeffrey P.
Vickers. Restricted Stock Awards are "restricted securities" as
defined in Rule 144 adopted under the Securities Act of 1933. The column
titled "All Other Compensation" is comprised entirely of profit sharing
amounts.
If the Company achieves net income in a fiscal year, the Board
of Directors may determine to contribute an amount based on the Company's
profits to the Employees' Profit Sharing Plan and Trust adopted in
December 1978 (the "Profit Sharing Plan"). An eligible employee may be
allocated from 0% to 15% of his compensation depending upon the total
contribution to the plan. A total of 20% of the amount allocated to an
individual vests after three years of service, 40% after four years, 60%
after five years, 80% after six years and 100% after seven or more years.
On retirement, an employee is eligible to receive the vested amount. On
death, 100% of the amount allocated to an individual is payable to the
employee's beneficiary. The Company accrued a $21,508 contribution for
1997 with contributions for 1996 and 1995 being $60,000 and $35,000,
respectively. As of December 31, 1997, vested amounts in the Profit
Sharing Plan for all officers as a group were approximately $366,000.
Effective July 1, 1997, the Company executed an Adoption
Agreement Nonstandardized Code 401(k) Profit Sharing Plan that includes a
401(k) Plan into the existing Profit Sharing Plan. Eligible employees
are allowed to defer up to 15% of their compensation with the Company
matching up to 5%.
Aggregated Option/SAR Exercises in last Fiscal Year
and FY-End Option/SAR Values
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End(#) at FY-End($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized($) Unexercisable Unexercisable
Jeffrey P.
Vickers, CEO -0- -0- 106,000/0 $245,125/0
At the 1993 Annual Meeting of Shareholders, the Company's 1993
Employees' Incentive Stock Option Plan (the "Plan") was approved by
shareholders. The purpose of the Plan is to enable the Corporation to
attract persons of training, experience and ability to continue as
employees and to furnish additional incentive to such persons, upon whose
initiative and efforts the successful conduct and development of the
business of the Corporation largely depends, by encouraging such persons
to become owners of the common stock of the Corporation.
The term of the Plan expires February 17, 2003, ten years from
the date the Plan was approved by the Board of Directors. If within the
duration of an option, there shall be a corporate merger consolidation,
acquisition of assets or other reorganization; and if such transaction
shall affect the optioned stock, the optionee shall thereafter be
entitled to receive upon exercise of his option those shares or
securities that he would have received had the option been exercised
prior to such transaction and the optionee had been a stockholder of the
Corporation with respect to such shares.
The Plan is administered by the Board of Directors. The
exercise price of the common stock offered to eligible participants under
the Plan by grant of an option to purchase common stock may not be less
than the fair market value of the common stock at the date of grant;
provided, however, that the exercise price shall not be less than 110% of
the fair market value of the common stock on the date of grant in the
event an optionee owns 10% or more of the common stock of the
Corporation. A total of 300,000 shares have been reserved for issuance
pursuant to options to be granted under the Plan. Of the 300,000
reserved shares, options have been issued for 295,000 shares pursuant to
the Plan.
Directors' Compensation
The officers of the Company who are also directors receive no
additional compensation for attendance at Board meetings. Directors,
other than Jeffrey P. Vickers and Cathy Kruse, were paid $200 per month
for Board meetings in 1997.
ITEM 12. SECURITES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of common
stock beneficially owned by each officer, director and nominee for
director of the Company and by all directors and officers as a group, as
of March 15, 1998. Unless otherwise indicated, the shareholders listed
in the table have sole voting and investment powers with respect to the
shares indicated.
Name of Person
or Number of Amount of
Class of Directors and Shares and Nature of Percent
Securities Officers as a Group Beneficial Ownership of Class
Common Stock, Jeffrey P. Vickers 374,934-Direct and 9.2%
$.01 par value Indirect(a)
Common Stock, Paul A. Krile 207,500-Direct(b) 5.1%
$.01 par value
Common Stock, Cathy Kruse 19,450-Direct(d) (c)
$.01 par value
Common Stock, Thomas F. Neubauer 20,500-Direct(e) (c)
$.01 par value
Common Stock, H. Dennis Hoffelt 39,000-Direct and (c)
$.01 par value Indirect(f)
Common Stock, Joseph V. Montalban 463,800-Direct(g) 11.3%
$.01 par value
Common Stock, Officers and 1,125,184-Direct and 27.5%
$.01 par value Directors as Indirect
a Group- (a)(b)(c)(d)(e)(f)(g)
(six persons)
- ------------------------
(a) Included in the 374,934 shares listed for Jeffrey P. Vickers are
139,634 shares owned directly by him, 2,500 in a self-directed
individual retirement account, 70,000 shares held jointly with his
wife, Nancy J. Vickers, 25,500 shares held directly by his wife,
1,300 shares in his wife's self-directed individual retirement
account, and an aggregate 30,000 shares held by him as custodian for
his three minor children. Also included are 106,000 shares which
may be purchased by Mr. Vickers under presently exercisable stock
options granted pursuant to the Company's 1993 Employees' Incentive
Stock Option Plan.
(b) Mr. Krile has sole voting and investment powers over these shares.
(c) Less than 1%.
(d) Included in the 19,450 are 14,500 shares which may be purchased by
Ms. Kruse under presently exercisable stock options granted pursuant
to the Company's 1993 Employees' Incentive Stock Option Plan.
(e) Included in the 20,500 are 9,500 shares which may be purchased by
Mr. Neubauer under presently exercisable stock options granted
pursuant to the Company's 1993 Employees' Incentive Stock Option
Plan.
(f) Mr. Hoffelt has sole voting and investment power over 11,500 of
shares and has shared voting and investment powers over the
remaining 27,500.
(g) Mr. Montalban has sole voting and investment powers over these
shares.
The following table sets forth information concerning persons
known to the Company to be the beneficial owners of more than 5% of the
Company's outstanding common stock as of March 15, 1998.
Amount of
Class of Name and Shares and Nature of Percent
Securities Address of Person Beneficial Ownership of Class
Common Stock, Joseph V. Montalban 463,800-Direct(a) 11.3%
$.01 par value Montalban Oil & Gas
Operations, Inc.
Box 200
Cut Bank, MT 59247
Common Stock, Jeffrey P. Vickers 374,934-Direct and 9.2%
$.01 par value 1814 14th Ave. W. Indirect(b)
Williston, ND 58801
Common Stock, Paul Krile 207,500-Direct(a) 5.1%
$.01 par value P. O. Box 329
Sioux Rapids, IA 50585
(a) This information was obtained from a Securities and Exchange Commission
filing.
(b) See footnote (a) of the immediately preceding table.
No arrangements are known by the Company which could, at a
subsequent date, result in a change in control of the Company. The
Company is not aware of any officer, director or holder of greater than
10% of the Company's common stock who has failed to file the required SEC
Forms 3, 4 or 5 on a timely basis for 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no transactions or series of similar transactions
since the beginning of the Company's last fiscal year or any currently
proposed transaction or series of similar transactions to which the
Company was or is to be a party, and which the amount involved exceeds
$10,000 and in which any director, executive officer, principal
shareholder or any member of their immediate family had or will have a
direct or indirect material interest.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as Part of this Report
(1) Financial Statements and Schedules See "Index to
Consolidated Financial Statements and Supplementary
Data" on next page. There are no financial
statement schedules filed herewith.
(2) Disclosures About Oil and Gas Producing Activities -
Unaudited See "Index to Consolidated Financial
Statements and Supplementary Data" on next page.
(3) Exhibits See "Exhibit Index" on page 51.
(b) Reports on Form 8-K
None.
(c) Exhibits required by Item 601 of Regulation S-K
See (a)(3) above.
(d) Financial Statement Schedules required by Regulation S-X
See (a)(1) above.
GEORESOURCES, INC., AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
Page
REPORT OF INDEPENDENT AUDITORS ON THE
CONSOLIDATED FINANCIAL STATEMENTS 27
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 28
Consolidated statements of operations 29
Consolidated statements of stockholders' equity 30
Consolidated statements of cash flows 31 - 32
Notes to consolidated financial statements 33 - 46
UNAUDITED SUPPLEMENTARY INFORMATION - Disclosures about
oil and gas producing activities 47 - 49
REPORT OF INDEPENDENT AUDITORS ON THE
CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors and Shareholders
GeoResources, Inc.
We have audited the accompanying consolidated balance sheets of
GeoResources, Inc., and Subsidiary as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity,
and cash flows for the years ended December 31, 1997, 1996 and 1995. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
GeoResources, Inc., and Subsidiary as of December 31, 1997 and 1996, and
the results of its operations and its cash flows for the years ended
December 31, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.
/s/ Richey, May & Co., P. C.
Denver, Colorado
March 1, 1998
GEORESOURCES, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
CURRENT ASSETS: 1997 1996
Cash and equivalents $ 490,385 $ 754,888
Trade receivables, net 521,934 936,045
Inventories 288,264 251,499
Prepaid expenses 31,422 18,201
Investments 25,966 57,771
Total current assets 1,357,971 2,018,404
PROPERTY, PLANT AND EQUIPMENT, at cost:
Oil and gas properties, using
the full cost method of accounting:
Properties being amortized 17,997,596 16,450,061
Properties not subject to amortization 124,672 93,640
Leonardite plant and equipment 3,211,825 3,216,597
Other 702,068 693,641
22,036,161 20,453,939
Less accumulated depreciation, depletion,
amortization and impairment (15,510,109) (14,708,047)
Net property, plant and equipment 6,526,052 5,745,892
OTHER ASSETS:
Mortgage loans receivable, related party 103,321 103,321
Other 44,984 42,348
Total other assets 148,305 145,669
TOTAL ASSETS $ 8,032,328 $ 7,909,965
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 770,204 $ 1,343,677
Current maturities of long-term debt 457,097 283,200
Accrued expenses 112,430 186,064
Total current liabilities 1,339,731 1,812,941
LONG-TERM DEBT, less current maturities 666,000 998,097
DEFERRED INCOME TAXES 335,000 225,000
CONTINGENCIES (NOTE I)
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share;
authorized 10,000,000 shares; issued
and outstanding, 4,097,214 and
4,060,714 shares, respectively 40,972 40,607
Additional paid-in capital 880,797 829,757
Retained earnings 4,769,828 4,003,563
Total stockholders' equity 5,691,597 4,873,927
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,032,328 $ 7,909,965
The accompanying notes are an integral part of these consolidated
financial statements.
GEORESOURCES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
OPERATING REVENUE:
Oil and gas sales $ 3,425,395 $ 2,964,939 $ 2,170,057
Leonardite sales 764,398 841,851 703,944
4,189,793 3,806,790 2,874,001
OPERATING COSTS AND EXPENSES:
Oil and gas production 1,335,605 1,082,324 950,116
Cost of leonardite sold 597,813 667,437 559,659
Depreciation, depletion
and amortization 850,599 674,805 601,814
Selling, general and
administrative 449,161 498,882 341,008
3,233,178 2,923,448 2,452,597
Operating income 956,615 883,342 421,404
OTHER INCOME (EXPENSE):
Interest expense (125,007) (113,384) (128,689)
Interest income 25,036 18,287 10,808
Other income and losses, net 19,621 31,050 28,366
(80,350) (64,047) (89,515)
Income before income taxes 876,265 819,295 331,889
INCOME TAX EXPENSE 110,000 85,569 28,000
Net income $ 766,265 $ 733,726 $ 303,889
EARNINGS PER SHARE:
Net income,
basic and diluted $ .19 $ .18 $ . 08
Weighted average number
of shares outstanding 4,076,284 4,056,274 4,025,234
Dilutive potential shares -
Stock options 63,361 38,686 13,470
Adjusted weighted average shares 4,139,645 4,094,960 4,038,704
The accompanying notes are an integral part of these consolidated
financial statements.
GEORESOURCES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
Balance, December 31, 1994 4,023,214 $ 40,232 $ 792,369 $2,965,948 $3,798,549
Issuance of common stock
as compensation 12,500 125 11,438 -- 11,563
Net income -- -- -- 303,889 303,889
Balance, December 31, 1995 4,035,714 40,357 803,807 3,269,837 4,114,001
Issuance of common stock
as compensation 25,000 250 25,950 -- 26,200
Net income -- -- -- 733,726 733,726
Balance, December 31, 1996 4,060,714 40,607 829,757 4,003,563 4,873,927
Issuance of common stock
as compensation 20,000 200 30,400 -- 30,600
Stock options exercised 16,500 165 20,640 -- 20,805
Net income -- -- -- 766,265 766,265
Balance, December 31, 1997 4,097,214 $ 40,972 $ 880,797 $4,769,828 $5,691,597
The accompanying notes are an integral part of these consolidated
financial statements.
GEORESOURCES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 766,265 $ 733,726 $ 303,889
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and amortization 850,599 674,805 601,814
Deferred income taxes 110,000 74,000 28,000
Issuance of common stock as compensation -- 26,200 11,563
Other 2,364 2,192 2,326
Changes in assets and liabilities:
Decrease (increase) in:
Trade receivables 414,111 (345,715) (96,735)
Inventories (36,765) 33,519 (38,551)
Prepaid expenses and other (13,221) (741) (187)
Hedging instruments 31,805 (47,652) 10,853
Increase (decrease) in:
Accounts payable 145,629 (87,604) (78,831)
Accrued expenses (43,034) 87,527 59,473
Net cash provided by operating
activities 2,227,753 1,150,257 803,614
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (2,707,097) (583,128) (899,677)
Proceeds from sale of property and equipment 364,550 -- 20,234
Other (7,314) (12,756) (47,215)
Net cash used in investing activities (2,349,861) (595,884) (926,658)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 425,000 325,000 665,000
Principal payments on long-term debt (583,200) (513,627) (367,330)
Proceeds from issuance of common stock 20,805 -- --
Debt issue costs (5,000) (2,936) (5,225)
Net cash provided by (used in)
financing activities (142,395) (191,563) 292,445
NET INCREASE (DECREASE) IN CASH
AND EQUIVALENTS (264,503) 362,810 169,401
CASH AND EQUIVALENTS, beginning of year 754,888 392,078 222,677
CASH AND EQUIVALENTS, end of year $ 490,385 $ 754,888 $ 392,078
The accompanying notes are an integral part of these consolidated
financial statements.
GEORESOURCES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid for:
Interest $ 124,245 $ 114,850 $ 127,990
Income taxes 9,922 1,569 336
The accompanying notes are an integral part of these consolidated
financial statements.
GEORESOURCES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations and Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of GeoResources, Inc., and its 82% owned subsidiary, Belmont Natural
Resource Company, Inc. ("BNRC"). All material intercompany
transactions and balances between the entities have been eliminated.
The minority interest in BNRC is not presented, as the amount is
immaterial.
GeoResources, Inc. (the "Company") is primarily involved in oil and gas
exploration, development and production in North Dakota and Montana and
the mining of leonardite and manufacturing of leonardite products in
North Dakota to be sold to customers located primarily in the Gulf of
Mexico coastal areas. BNRC was incorporated in 1991 to exploit natural
gas opportunities in the Pacific Northwest. All properties of the
Company and BNRC are located in the United States.
Reclassifications
Certain accounts in the prior-year financial statements have been
reclassified for comparative purposes to conform with the presentation
in the current-year financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant estimates used in preparing these financial
statements include the unaudited quantity of oil and gas reserves which
directly effects the computation of depletion of oil and gas properties.
It is at least reasonably possible that the estimates used will change
within the next year.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
Investments
The Company's investments consist of marketable equity securities and
various derivative financial instruments related to crude oil and other
energy products.
Marketable equity securities are stated at market value. Securities
acquired with the intent to resell in order to profit from short-term
price movements are classified as trading account securities and related
unrealized gains and losses are included in other income. Other
securities are classified as assets available-for-sale and related
unrealized gains or losses are recorded as a component of stockholders'
equity. The specific security sold is used to compute realized gains or
losses. All of the Company's securities are classified as trading
account securities.
The Company periodically uses various derivative financial instruments
to hedge a portion of future oil sales against the risk of possible
decreases of crude oil prices. These instruments are accounted for as
hedges and, accordingly, gains and losses are deferred and recognized
when the future oil sales occur.
Oil and Gas Properties
The Company utilizes the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with the acquisition,
exploration and development of oil and gas reserves (including costs of
abandoned leaseholds, delay lease rentals, dry hole costs, geological
and geophysical costs, certain internal costs associated directly with
acquisition, exploration and development activities, and site
restoration and environmental exit costs) are capitalized.
All capitalized costs of oil and gas properties, including the estimated
future costs to develop proved reserves, are amortized on the unit-of-
production method using estimates of proved reserves. Investments in
unproved properties and major development projects are not amortized
until proved reserves associated with the projects can be determined or
until impairment occurs. If the results of an assessment indicate that
the properties are impaired, the amount of the impairment is added to
the capitalized costs to be amortized. The Company's oil and gas
depreciation, depletion and amortization rate per equivalent barrel of
oil produced was $3.40, $3.27 and $3.09 for 1997, 1996 and 1995,
respectively.
In addition, the capitalized costs are subject to a "ceiling test,"
which basically limits such costs to the aggregate of the "estimated
present value," discounted at a 10-percent interest rate of future net
revenues from proved reserves, based on current economic and operating
conditions, plus the lower of cost or fair market value of unproved
properties.
Gains or losses are not recognized upon the sale or other disposition of
oil and gas properties, except in extraordinary transactions.
Costs not being amortized at December 31, 1997, consist of the
unevaluated, unimpaired cost of undeveloped oil and gas properties which
were acquired during the following years:
1997 $ 40,264
1996 15,993
1995 44,203
1994 and prior 24,212
Total $ 124,672
It is expected that evaluation of the above properties will occur
primarily over the next four years.
Other Property and Equipment
Depreciation of other property and equipment is computed principally on
the straight-line method over the following estimated useful lives:
Buildings 10-25 years
Machinery and equipment 3-10 years
Impairment of Long-Lived Assets
Potential impairment of long-lived assets (other than oil and gas
properties) is reviewed whenever events or changes in circumstances
indicate the carrying amount of the assets may not be recoverable.
Impairment is recognized when the estimated future net cash flows
(undiscounted and without interest charges) from the asset are less than
the carrying amount of the asset. No impairment losses have been
recognized on long-lived assets for the years ended December 31, 1997,
1996 and 1995.
Operating Costs and Expenses
Oil and gas production costs and the cost of leonardite sold exclude a
provision for depreciation and depletion. Depreciation and depletion
expense is shown in the aggregate in the accompanying statements of
operations.
Income Taxes
Provisions for income taxes are based on taxes payable or refundable for
the current year and deferred taxes on temporary differences between the
amount of taxable income and pretax financial income and between the tax
bases of assets and liabilities and their reported amounts in the
financial statements. Deferred tax assets and liabilities are included
in the financial statements at currently enacted income tax rates
applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled. A valuation
allowance is provided for deferred tax assets not expected to be
realized.
Earnings Per Share of Common Stock
Earnings per share has been computed based on the weighted average
number of common shares outstanding. The dilutive effect of outstanding
stock options was immaterial.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130-Reporting Comprehensive
Income. SFAS No. 130 requires the reporting and display, in a full set
of general-purpose financial statements, of all items that are required
to be recognized under accounting standards as components of
comprehensive income. SFAS No. 130 is effective for financial
statements issued for periods beginning after December 15, 1997 and
reclassification of financial statements for earlier periods for
comparative purposes is required. The adoption of SFAS No. 130 will not
have a material impact on these financial statements
In June 1997, the FASB issued SFAS No. 131-Disclosures about Segments of
an Enterprise. SFAS No. 131 establishes standards for the way that
public companies report information about their operating segments,
products and services, geographic areas, and major customers. SFAS No.
131 is effective for periods beginning after December 15, 1997 and
requires restatement of information presented for prior periods. The
adoption of SFAS No. 131 will not have a material impact on these
financial statements.
B. INDUSTRY SEGMENTS AND MAJOR CUSTOMER:
Segment information
The Company conducts all of its operations within the United States,
which consist principally of oil and gas exploration and production and
the mining and processing of leonardite. There are no sales or other
transactions between these two business segments. Presented below is
information concerning the Company's business segments for the years
ended December 31, 1997, 1996 and 1995:
1997 1996 1995
Revenue:
Oil and gas $ 3,425,395 $ 2,964,939 $ 2,170,057
Leonardite 764,398 841,851 703,944
$ 4,189,793 $ 3,806,790 $ 2,874,001
Operating income:
Oil and gas $ 1,365,729 $ 1,330,169 $ 744,465
Leonardite 33,859 40,737 10,657
General corporate
activities (442,973) (487,564) (333,718)
$ 956,615 $ 883,342 $ 421,404
Depreciation and depletion:
Oil and gas $ 724,061 $ 552,446 $ 475,476
Leonardite 108,903 107,087 111,958
General corporate
activities 17,635 15,272 14,380
$ 850,599 $ 674,805 $ 601,814
Identifiable assets, net:
Oil and gas $ 5,452,759 $ 5,014,782 $ 4,110,608
Leonardite 1,452,847 1,501,054 1,552,442
General corporate
activities 1,126,722 1,394,129 1,027,235
$ 8,032,328 $ 7,909,965 $ 6,690,285
Capital expenditures incurred:
Oil and gas $ 1,920,470 $ 1,156,842 $ 1,162,393
Leonardite 43,498 29,160 26,264
General corporate
activities 9,927 21,095 4,095
$ 1,973,895 $ 1,207,097 $ 1,192,752
Major Customer and Concentrations of Credit Risk
Sales to a major oil and gas customer were 71%, 65% and 53% of total
revenue for the years ended December 31, 1997, 1996 and 1995,
respectively. Accounts receivable from this major customer were 44% and
38% of total accounts receivable at December 31, 1997 and 1996,
respectively.
The Company has two bank accounts with balances of approximately
$191,000 and $226,000, at December 31, 1997. Each account is federally
insured for balances up to $100,000.
C. TRADE RECEIVABLES AND INVENTORIES:
Trade receivables at December 31, 1997 and 1996 are comprised of the
following:
1997 1996
Oil and gas purchasers $ 318,096 $ 700,833
Leonardite customers 215,254 246,628
533,350 947,461
Less allowance for
doubtful accounts (11,416) (11,416)
$ 521,934 $ 936,045
As of December 31, 1997 and 1996, inventories by major classes are
comprised of the following:
1997 1996
Crude oil $ 29,550 $ 36,022
Leonardite inventories:
Finished products 90,302 52,543
Raw materials 85,433 94,387
Materials and supplies 82,979 68,547
Total leonardite inventories 258,714 215,477
$ 288,264 $ 251,499
D. MORTGAGE LOANS RECEIVABLE, RELATED PARTY
Mortgage loans receivable, related party represent mortgage loans on the
residence of an officer/shareholder of BNRC purchased from a third party
in November 1993, and are recorded at purchase cost. The mortgages
require monthly payments of interest at 8% per annum with principal due
January 14, 1999. The Company received interest income from these loans
of $8,100 for each of the years ended December 31, 1997, 1996 and 1995.
E. VOLUMETRIC PRODUCTION PAYMENT
On December 3, 1997, the Company conveyed to Koch Producer Services,
Inc., a volumetric production payment of 27,375 barrels of crude oil to
be produced from a specified property through November 1998. The gross
proceeds of this sale totaled $364,550 and were credited on the
accompanying balance sheet to oil and gas properties being amortized.
No gain or loss was recognized on the sale. The agreement requires the
Company to maintain tangible net worth of not less than $3,500,000 and
prohibits the Company from incurring any debt secured by the specified
property.
F. LONG-TERM DEBT:
Long-term debt at December 31, 1997 and 1996 consists of the following
loans and a revolving line of credit (RLOC) which are all with one bank:
1997 1996
The 1989 Leonardite Loan, prime plus 1%
(9.5% total rate at December 31, 1997),
due in monthly installments of $7,600 plus
interest, due December 1998, unsecured $ 90,097 $ 181,297
The 1993 Oil & Gas Loan, prime plus 1%
(9.5% total rate at December 31, 1997),
due in monthly installments of $16,000 plus
interest, due September 1999, collateralized
by oil and gas properties 333,000 525,000
The 1995 Oil & Gas Loan, prime plus 1%
(9.5% total rate at December 31, 1997),
due in monthly installments of $14,583 plus
interest, due December 2001, collateralized
by oil and gas properties 700,000 575,000
The 1997 Oil & Gas RLOC, $3,000,000
revolving line of credit, interest payable
monthly at prime plus .75%, (9.25% total
rate at December 31, 1997), expires
January 5, 2001, collateralized by
oil and gas properties -- --
Total long-term debt 1,123,097 1,281,297
Less current maturities (457,097) (283,200)
Long-term debt, less current
maturities $ 666,000 $ 998,097
Aggregate maturities required on long-term debt at December 31, 1997,
are as follows:
Year Ending December 31:
1998 $ 457,097
1999 316,000
2000 175,000
2001 175,000
$ 1,123,097
The Company's borrowing base for debt secured by oil and gas properties
is limited by the net present value of future oil and gas production of
the properties as determined annually by the bank.
The Company's long-term debt was obtained pursuant to financing
agreements which include the following covenants: Maintain a current
ratio of not less than 1.25 to 1 exclusive of current maturities of
long-term debt; maintain debt to tangible net worth of not more than 1.5
to 1; maintain a net worth of at least $3,500,000; not encumber certain
of its assets; restricts borrowings from, and credit extensions to,
other parties; restricts reorganization or mergers in which the Company
is not the surviving corporation; and not pay cash dividends without the
bank's consent.
G. INCOME TAXES:
The components of income tax expense for the years ended December 31,
1997, 1996 and 1995, are as follows:
1997 1996 1995
Current tax expense $ -- $ 11,569 $ --
Deferred tax expense 369,000 232,000 95,000
Decrease in deferred
tax assets valuation
allowance (259,000) (158,000) (67,000)
$ 110,000 $ 85,569 $ 28,000
During 1997, 1996 and 1995, the Company recorded a deferred tax expense
of $369,000, $232,000 and $95,000, respectively. This related primarily
to net income which was not currently taxable due to the deduction of
intangible drilling costs for tax purposes in 1997 and 1996 and the
utilization of net operating loss carryforwards in 1995. The Company
also decreased the deferred tax asset valuation allowance by $259,000,
$158,000 and $67,000 during 1997, 1996 and 1995, respectively, primarily
based upon the projection of utilizing additional statutory depletion
carryforwards in the future.
The tax effects of significant temporary differences and carryforwards
which give rise to the Company's deferred tax assets and liabilities at
December 31, 1997 and 1996, are as follows:
1997 1996
Deferred Tax Assets:
Net operating loss carryforward $ 390,000 $ 278,000
Statutory depletion carryforward 1,113,000 983,000
Tax credit carryforwards 69,000 226,000
Other 47,000 70,000
1,619,000 1,557,000
Valuation Allowance:
Beginning of year (751,000) (909,000)
(Increase) decrease 259,000 158,000
End of year (492,000) (751,000)
Deferred Tax Liabilities:
Accumulated depreciation and
depletion (1,462,000) (1,031,000)
Net Deferred Tax Liability, long-term $ (335,000) $ (225,000)
The provision for income taxes does not bear a normal relationship to
pre-tax earnings. A reconciliation of the U.S. federal income tax rate
with the actual effective rate for the years ended December 31, 1997,
1996 and 1995 is as follows:
1997 1996 1995
Income tax expense at statutory rate 35% 35% 35%
Loss carryover benefits -- -- (14)
Change in valuation allowance (30) (20) (21)
Graduated tax rate difference -- (13) --
State income taxes and other 8 8 8
13% 10% 8%
For income tax purposes, the Company has a statutory depletion carryover
of approximately $3,360,000 which, subject to certain limitations, may
be utilized to reduce future taxable income. This carryforward does not
expire. The Company also has net operating loss carryovers and
investment tax credit carryovers (accounted for using the flow-through
method), which, if not utilized, expire as follows:
Investment
Net operating tax credit
Year of expiration loss carryover carryover
1998-2000 $ -- $ 45,000
2001 412,000 --
2003 102,000 --
2008 115,000 --
2009 237,000 --
2012 313,000 --
Total $ 1,179,000 $ 45,000
H. STOCK OPTION AND PROFIT-SHARING PLANS:
Stock option plan
In 1993, the Company adopted the 1993 Incentive Stock Option Plan,
whereby 300,000 shares of the Company's common stock are reserved for
options which may be granted pursuant to the terms of the plan. Under
the terms of the plan, the option price may not be less than 100% of the
fair market value of the Company's common stock on the date of grant,
and if the optionee owns more than 10% of the voting stock, the option
price per share shall not be less than 110% of the fair market value.
Prior to 1995, no options had been granted. During 1995, options were
granted to purchase 95,000 shares of common stock at an exercise price
of $1.15 per share. No options were granted in 1996. During 1997,
options were granted to purchase 102,500 shares at $2.37 per share and
97,500 shares at $2.31 per share. No options were exercised prior to
1997. During 1997, options were exercised to purchase 16,500 common
shares for total proceeds to the Company of $20,805. At December 31,
1997, the following options are outstanding:
Number of shares Exercise Price Expiration Date
80,000 $ 1.15 November 2000
101,000 2.37 May 2002
97,500 2.31 December 2002
278,500
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation,
the Company continues to apply the provisions of APB Opinion 25 in
accounting for its plan. Accordingly, no compensation cost was
recognized for the options granted. Had stock-based compensation cost
been determined based upon the fair value of the options estimated on
the date of grant the Company's net income and earnings per share would
have been reduced to pro forma amounts of $598,065 and $.15 and $269,839
and $.07, in 1997 and 1995, respectively. The fair value of the options
on the date of grant is estimated using the Black-Scholes option-pricing
model with the following assumptions:
1997 1995
Expected volatility 39% 31%
Risk free interest rate 5.71% 5.77%
Expected lives 3.5 years 4 years
Expected dividends None None
Profit-sharing plan
The Company has a 401(k) profit sharing plan that covers all employees
with one year of service who elect to enter the plan. Effective July 1,
1997, the Company amended the plan to provide for employee
contributions. Employees may elect to contribute up to 15% of their
compensation to a maximum of $10,000. The Company contributes an amount
equal to each employee's contribution up to a maximum of 5% of the
employee's compensation. The Company may also make additional
discretionary contributions to the plan. Prior to 1997, contributions
to the plan were at the discretion of the Board of Directors. The
Company's contributions to the plan for the years ended December 31,
1997, 1996 and 1995 were $21,508, $60,000 and $35,000, respectively.
I. CONTINGENCIES:
All of the Company's operations are generally subject to federal, state
or local environmental regulations. The Company's oil and gas business
segment is affected particularly by those environmental regulations
concerned with the disposal of produced oilfield brines and other
wastes. The Company's leonardite mining and processing segment is
subject to numerous state and federal environmental regulations,
particularly those concerned with air quality at the Company's
processing plant, and surface mining permit and reclamation regulations.
The amount of future environmental compliance costs cannot be determined
at this time.
J. OFFICE FACILITIES:
In 1991, the Company purchased an office building, one-third of which it
occupies. The building is included in other property and equipment in
the accompanying balance sheets and consists of the following at
December 31, 1997 and 1996:
1997 1996
Building and improvements $ 163,834 $ 163,834
Accumulated depreciation (55,563) (47,371)
$ 108,271 $ 116,463
The Company leases the remainder of the building to unaffiliated
businesses under cancelable lease agreements. During 1997, 1996 and
1995, the Company received $22,200, $20,938 and $19,500, respectively,
in rental income from the building which is included in other income in
the accompanying statements of operations.
K. FINANCIAL INSTRUMENTS:
The carrying amounts reflected in the consolidated balance sheets for
cash and equivalents approximates their fair value due to the short
maturity of the instruments. The carrying amount of marketable equity
securities is fair value based on quoted market prices. The carrying
amount of derivative financial instruments was $6,807 and $50,450 at
December 31, 1997 and 1996, respectively. The fair value of those
instruments, based on quoted market prices, was ($4,291) and $17,450 at
December 31, 1997 and 1996, respectively. The carrying value of
mortgage loans receivable approximates fair value based on discounted
future cash flows.
The Company uses derivative financial instruments to manage its crude
oil commodity price risk. They are not used for trading purposes. The
Company has in recent years hedged 5% to 35% of its crude oil sales
using various financial instruments including "put" and "call"
options and, to a lesser extent, actual future contracts on crude oil
and energy products that trade on the New York Mercantile Exchange
("NYMEX"). The variation in types of instruments employed results from
a strategy designed to provide primarily short to intermediate term
protection (less than one year) from oil price declines that would occur
in a wide range. Generally, the Company does not hedge against narrow-
range oil price movements. Since these financial instruments correlate
to crude oil and energy products price movements, gains or losses
resulting from market changes will be offset by losses or gains on the
Company's crude oil sales. Included in oil and gas sales are losses
from hedging activities totaling $30,269, $102,656 and $10,401 for the
years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997, the notional principal amount of outstanding call
options was $15,800 and the principal amount of outstanding forward
contracts was $318,980. Deferred net hedging losses amounted to $11,098
and $33,000 at December 31, 1997 and 1996, respectively.
L. FOURTH QUARTER ADJUSTMENTS:
During the fourth quarter of 1997, deferred income tax liabilities
increased $54,000 and income tax expense increased $46,491 over the
amounts reported at September 30, 1997, due to changes in estimates
regarding the utilization of tax credit carryforwards.
GEORESOURCES, INC., AND SUBSIDIARY
UNAUDITED SUPPLEMENTARY INFORMATION
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
Net capitalized costs related to the Company's oil and gas producing
activities are summarized as follows as of December 31, 1997, 1996 and
1995:
1997 1996 1995
Proved Properties $ 17,997,596 $ 16,450,061 $ 15,272,170
Unproved properties 124,672 93,640 157,174
Total 18,122,268 16,543,701 15,429,344
Less accumulated depreciation,
depletion, amortization and
impairment (13,069,796) (12,345,734) (11,793,289)
Net capitalized costs $ 5,052,472 $ 4,197,967 $ 3,636,055
Costs incurred in oil and gas property acquisition, exploration and
development activities, including capital expenditures are summarized as
follows for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
Property acquisition costs:
Proved $ 28,420 $ 42,611 $ 189,036
Unproved 55,230 21,027 15,479
Exploration costs 75,765 113,145 115,957
Development costs 1,761,055 980,059 841,921
$ 1,920,470 $ 1,156,842 $ 1,162,393
The Company's results of operations from oil and gas producing activities
(excluding corporate overhead and financing costs) are presented below for
the years ended December 31, 1997, 1996 and 1995.
1997 1996 1995
Oil and gas sales $ 3,425,395 $ 2,964,939 $ 2,170,057
Production costs (1,335,605) (1,082,324) (950,116)
Depletion, depreciation
and amortization (724,061) (552,446) (475,476)
1,365,729 1,330,169 744,465
Imputed income tax provision -- 10,000 26,000
$ 1,365,729 $ 1,320,169 $ 718,465
GEORESOURCES, INC., AND SUBSIDIARY
UNAUDITED SUPPLEMENTARY INFORMATION
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
The reserve information presented below is based upon reports prepared by
the independent petroleum engineering firm of Broschat Engineering and
Management Services. The Company emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are more
imprecise than those of mature producing oil and gas properties.
Accordingly, these estimates are expected to change as future information
becomes available.
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas, and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under economic and operating conditions existing as
of the end of each respective year. The year-end selling price of oil and
gas is one of the primary factors affecting the determination of proved
reserve quantities which fluctuate directly with that price.
Presented below is a summary of the changes in estimated proved reserves of
the Company, all of which are located in the United States, for the years
ended December 31, 1997, 1996 and 1995:
1997 1996 1995
Oil Gas Oil Gas Oil Gas
(bbl) (mcf) (bbl) (mcf) (bbl) (mcf)
Proved reserves,
beginning of
year 2,154,000 261,000 2,047,000 266,000 1,642,000 244,000
Purchases of
reserves-in-
place 1,000 -- 21,000 -- 67,000 --
Sales of reserves
-in-place (25,000) -- -- -- -- --
Extensions and
discoveries 201,000 1,000 12,000 3,000 5,000 1,000
Improved
recovery 350,000 -- 156,000 -- 443,000 --
Revisions of
previous
estimates (83,000) 1,000 85,000 5,000 42,000 34,000
Production (211,000) (10,000) (167,000) (13,000) (152,000) (13,000)
Proved reserves,
end of year 2,387,000 253,000 2,154,000 261,000 2,047,000 266,000
GEORESOURCES, INC., AND SUBSIDIARY
UNAUDITED SUPPLEMENTARY INFORMATION
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
Proved developed oil and gas reserves are those expected to be recovered
through existing wells with existing equipment and operating methods.
Proved developed reserves of the Company are presented below as of December
31:
Oil Gas
(bbl) (mcf)
1997 1,640,000 253,000
1996 1,366,000 261,000
1995 1,292,000 266,000
Statement of Financial Accounting Standards No. 69 prescribes guidelines
for computing a standardized measure of future net cash flows and changes
therein relating to estimated proved reserves. The Company has followed
these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are
determined by applying year-end selling prices and year-end production and
development costs to the estimated quantities of oil and gas to be
produced. The limitations inherent in the reserve quantity estimation
process, as discussed previously, are equally applicable to the
standardized measure computations since these estimates are the basis for
the valuation process. Estimated future income taxes are computed using
current statutory income tax rates including consideration for estimated
future statutory depletion, depletion carryforwards, net operating loss
carryforwards, and investment tax credit carryforwards. The resulting
future net cash flows are reduced to present value amounts by applying a
10% annual discount factor.
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and, as such, do not
necessarily reflect the Company's expectations of actual revenues or future
net cash flows to be derived from those reserves nor their present worth.
GEORESOURCES, INC., AND SUBSIDIARY
UNAUDITED SUPPLEMENTARY INFORMATION
DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES
Presented below is the standardized measure of discounted future net cash
flows as of December 31, 1997, 1996 and 1995:
1997 1996 1995
Future cash inflows $ 33,521,000 $ 46,708,000 $ 30,628,000
Future production costs (13,602,000) (17,419,000) (13,369,000)
Future development costs (3,495,000) (3,078,000) (2,993,000)
Future income tax expense (5,318,000) (7,385,000) (3,423,000)
Future net cash flows 11,106,000 18,826,000 10,843,000
Less effect of a 10%
discount factor (4,587,000) (7,380,000) (4,381,000)
Standardized measure of
discounted future net
cash flows relating to
proved reserves $ 6,519,000 $ 11,446,000 $ 6,462,000
The principal sources of change in the standardized measure of discounted
future net cash flows are as follows for the years ended December 31, 1997,
1996 and 1995:
1997 1996 1995
Standardized measure,
beginning of year $ 11,446,000 $ 6,462,000 $ 4,280,000
Sales of oil and gas produced,
net of production costs (2,090,000) (1,985,000) (1,234,000)
Net changes in prices and
production costs (6,612,000) 6,452,000 2,256,000
Purchases of reserves-in-place 1,000 121,000 436,000
Sales of reserves-in-place (120,000) -- --
Extensions, discoveries and other
additions, less related costs 2,654,000 1,369,000 2,203,000
Revisions of previous quantity
estimates and other (713,000) 1,209,000 599,000
Development costs incurred
during the year and changes
in estimated future
development costs (1,011,000) (582,000) (1,415,000)
Accretion of discount 1,595,000 850,000 514,000
Net change in income taxes 1,369,000 (2,450,000) (1,177,000)
Standardized measure, end of year $ 6,519,000 $ 11,446,000 $ 6,462,000
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GEORESOURCES, INC. (the "Registrant")
Dated: March 27, 1998 /s/ J. P. Vickers
J. P. Vickers, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and
appoints J. P. VICKERS and DENNIS HOFFELT his true and lawful attorneys-in-
fact and agents, each acting alone, with full power of stead, in any and
all capacities, to sign any or all amendments to this Annual Report on Form
10-K and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, each acting alone, full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in each acting alone, or
his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
Signatures Title Date
/s/ J. P. Vickers President (principal execu- 3/27/98
J. P. Vickers tive officer and principal financial
officer) and Director
/s/ Cathy Kruse Secretary/Treasurer 3/27/98
Cathy Kruse and Director
/s/ Dennis Hoffelt Director 3/27/98
Dennis Hoffelt
/s/ Joseph V. Montalban Director 3/27/98
Joseph V. Montalban
/s/ Paul A. Krile Director 3/27/98
Paul A. Krile
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
GEORESOURCES, INC.
(Commission File Number: 0-8041)
EXHIBIT INDEX
FOR
Form 10-K for 1997 fiscal year.
Page Number
in Sequential
Numbering of all
Form 10-K and
Exhibit Exhibit Pages
3.1 Registrant's Bylaws, as amended, November 30, 1994 *
3.2 Registrant's Articles of Incorporation, as
amended to date, incorporated by reference to
Exhibit 3.1 of the Registrant's Form
10-K for fiscal year, 1983 *
10.1 Mining Lease and Agreement dated April 6, 1988,
by and between Roger C. Ryan, Susan Ryan,
Constance Ryan, Charlotte McConnell and Joseph W.
Ryan as Lessors, and GeoResources, Inc. as Lessee
incorporated by reference to Exhibit 10.4 of
Registrant's Form 10-Q for fiscal quarter ended
March 31, 1988 *
10.2 Credit Agreement dated January 24, 1989, by and
between GeoResources, Inc. and Norwest Bank
Billings, incorporated by reference to Exhibit
10.25 of the Registrant's Form 10-K for fiscal
year, 1988 *
10.3 Promissory Note dated January 24, 1989, by and
between GeoResources, Inc., as Borrower and
Norwest Bank Billings, incorporated by reference
to Exhibit 10.26 of the Registrant's
Form 10-K for fiscal year, 1988 *
10.4 Combination Mortgage, Security Agreement and
Fixture Financing Statement dated January 24,
1989, by and between GeoResources, Inc., as
Mortgagor/Debtor and Norwest Bank Billings, as
Mortgagee/Secured party, incorporated by
reference to Exhibit 10.27 of the Registrant's
Form 10-K for fiscal
year, 1988 *
10.5 Mortgage, Security Agreement, Assignment of
Production and Financing Statement dated January
24, 1989, by and between GeoResources, Inc., as
Mortgagor/Debtor and Norwest Bank Billings, as
Mortgagee/Secured party, incorporated by
reference to Exhibit 10.28 of the Registrant's
Form 10-K for fiscal year, 1988 *
10.6 Modification of Note of January 24, 1989, by and
between Norwest Bank Billings and GeoResources,
Inc., effective January 2, 1992, incorporated by
reference to Exhibit 10.1 of the Registrant's
Form 10-Q for fiscal quarter ended March 31,
1992 *
10.7 License Agreement dated March 22, 1993, by and
between GeoResources, Inc. and Central Arizona
Material Co., incorporated by reference to
Exhibit 10.1 of the Registrant's Form
10-Q for fiscal quarter ended March 31, 1993 *
10.8 Secured Form Loan and Revolving Credit Agreement
dated April 29, 1993, by and between
GeoResources, Inc. and Norwest Bank Billings,
incorporated by reference to Exhibit 10.1 of the
Registrant's Form 10-Q for fiscal quarter ended June
30, 1993 *
10.9 Mortgage, Security Agreement, Assignment of
Production and Financing Statement dated April
29, 1993, by and between GeoResources, Inc., as
Mortgagor and Norwest Bank Billings, as
Mortgagee, incorporated by reference to Exhibit
10.2 of the Registrant's Form 10-Q for fiscal
quarter ended June 30, 1993 *
10.10 The Registrant's 1993 Employees' Incentive Stock
Option Plan, incorporated by reference as Exhibit
A to the Registrant's definitive Proxy Statement
dated May 5, 1993 *
10.11 Amended and Restated Secured Term Loan and
Revolving Credit Agreement made as of September
1, 1995, by and between GeoResources, Inc. and
Norwest Bank Montana *
10.12 First Amendment of Mortgage, Security Agreement,
Assignment of Production and Financing Statement
and Mortgage - Collateral Real Estate Mortgage
dated September 1, 1995, by and between
GeoResources, Inc. and Norwest Bank Montana *
10.13 Commercial Installment Note with addendum dated
February 1, 1997, by and between GeoResources,
Inc. and Norwest Bank Billings, incorporated by
reference to Exhibit 10.13 of Registrant's Form
10-K for fiscal year ended December 31, 1997 *
10.14 Purchase Agreement for Volumetric Production
Payment dated as of December 3, 1997, by and
between GeoResources, Inc. and Koch Producer
Services, Inc. and all related documents. 54
10.15 Amended and Restated Secured Term Loan and
Revolving Credit Agreement made as of December
5, 1997, by and Between GeoResources, Inc.
and Norwest Bank Montana, and all related
documents. 196
27 Financial Data Schedule
PURCHASE AGREEMENT FOR VOLUMETRIC PRODUCTION PAYMENT
between
GEORESOURCES, INC.,
and
KOCH PRODUCER SERVICES, INC.
Dated as of December 3, 1997
TABLE OF CONTENTS
Page
Section 1 Defined Terms 1
Section 2 Agreement of Sale and Purchase 1
Section 3 Representations and Warranties of Seller 2
Section 4 Representations and Warranties of Purchaser 6
Section 5 Covenants 6
Section 6 Closing Date and Place 16
Section 7 Transactions on and After the Closing Date 16
Section 8 Audit 16
Section 9 Obligations Absolute 17
Section 10 Conditions to Obligations of Parties 17
Section 11 Conditions to Obligations of Seller 17
Section 12 Conditions to Obligations of Purchaser 18
Section 13 Recording 19
Section 14 Amendments to Financings, etc. 20
Section 15 Remedies of Purchaser 20
Section 16 No Recourse 23
Section 17 Notices 23
Section 18 Expenses 24
Section 19 Survival 25
Section 20 Successors and Assigns 25
Section 21 Interest on Unpaid Amounts 25
Section 22 Maximum Interest 26
Section 23 Miscellaneous Provisions 27
Section 24 Section Captions 27
Section 25 Indemnity 27
Section 26 Servicer 28
Section 27 Right of First Refusal 28
Section 28 Choice of Law 29
Section 29 Forum Selection and Consent to Jurisdiction 29
Section 30 Waiver of Jury Trial 29
Section 31 No Oral Agreements 30
Annexes and Schedules to Conveyance
Annex I - Form of Conveyance of Volumetric Production Payment
Annex II - List of Subject Interests For Title Opinions
Annex III - Form of Monthly Hydrocarbons Report
Annex IV - Wire Transfer Instructions for Purchase
Annex V - [Intentionally Omitted]
Annex VI - Insurance
Annex VII - Definitions
Annex VIII - Form of Purchaser's Monthly Report
Schedule I - Quality Standards
Schedule II - Exceptions to Representation
Schedule III - Plan of Development
PURCHASE AGREEMENT FOR VOLUMETRIC PRODUCTION PAYMENT
THIS PURCHASE AGREEMENT FOR VOLUMETRIC PRODUCTION PAYMENT, dated as of
December 3, 1997 (herein, as the same may be amended or modified from time to
time, called this "Agreement" or this "Purchase Agreement"), is entered into
between GEORESOURCES, INC., a Colorado corporation (herein called "Seller"),
and KOCH PRODUCER SERVICES, INC., a Delaware corporation (herein called
"Purchaser").
W I T N E S S E T H:
WHEREAS, Seller owns certain oil and gas leasehold and other interests
located in the State of North Dakota (which leasehold and other interests are
more specifically described and defined in the Conveyance (as hereinafter
defined)); and
WHEREAS, Seller intends, upon the terms and conditions set forth below,
to sell and convey to Purchaser a production payment (herein called the
"Production Payment") of certain volumes of Oil produced from the Subject
Interests and all rights to receive proceeds of the sale of such production,
and Purchaser intends to purchase the Production Payment upon such terms and
conditions, such Production Payment to be sold and conveyed to be
substantially as described in the form of the Conveyance of Volumetric
Production Payment annexed hereto as Annex I (herein called the "Conveyance"):
NOW THEREFORE, in consideration of the premises and the mutual promises
and agreements herein contained, the sufficiency of which is hereby
acknowledged, it is agreed as follows:
Section 1 Defined Terms. For purposes of this Agreement, unless the
context shall otherwise require, all undefined capitalized terms shall be used
herein with the same meaning as assigned to such term in Annex VII hereto.
Section 2 Agreement of Sale and Purchase. Subject to the terms and
conditions of this Agreement, Seller agrees to sell and Purchaser agrees to
buy the Production Payment for a total purchase price of $364,550 (the
"Purchase Price"). Consummation of the sale and purchase (herein called the
"Closing") shall be on the date provided for closing (herein called the
"Closing Date") in Section 6 hereof. Seller intends to sell to an affiliate
of Purchaser (the "Oil Buyer") the Residual Hydrocarbons pursuant to that
certain Crude Oil Purchase Agreement, dated as of December 2, 1997 (the "Crude
Oil Purchase Agreement"), at the price and other terms in effect at the time
of delivery in accordance with the terms of such Crude Oil Purchase Agreement.
Seller shall pay Purchaser a structuring fee of $3,646, to be paid out of the
funds payable to Seller at Closing.
Section 3 Representations and Warranties of Seller. Seller represents
and warrants (which representations and warranties shall survive execution,
delivery and termination of the Conveyance) that except as set forth on
Schedule II:
(a) Seller has the full legal power, right and capacity to enter into
and perform this Agreement, the Conveyance and the other Production Payment
Documents and to sell and convey the Production Payment. The consummation of
the transactions contemplated by this Agreement, the Conveyance, and the other
Production Payment Documents are within Seller's corporate powers, have
received all necessary governmental and other approvals, exemptions,
authorizations, licenses and permits (if any shall be required), and do not
and will not contravene or conflict with any provision of any law, rule,
regulation, order, writ, judgment, decree, determination or award presently in
effect having applicability to Seller, and do not and will not result in the
breach or termination of any provision of, or constitute a default under, any
indenture, mortgage, deed of trust or other agreement or instrument to which
Seller is a party or by which Seller or his properties may be bound,
including, without limitation, any confidentiality agreement or restrictions
or disclosure of information.
(b) This Agreement and the other Production Payment Documents have
been duly executed and delivered and constitute the legal, valid and binding
obligation of Seller, enforceable against Seller in accordance with their
terms, except as enforcement may be limited by bankruptcy, reorganization,
insolvency, moratorium or other laws affecting the enforcement of creditors'
rights generally and subject, as to enforceability, to equitable principles of
general application (regardless of whether enforcement is sought in a
proceeding in equity or at law).
(c) No authorization, consent or approval, or any formal exemption, of
any governmental body or regulatory authority (federal, state or local) is or
will be necessary to the valid execution, delivery or performance by Seller of
this Agreement or the other Production Payment Documents.
(d) Seller has not received any notice of default and to Seller's
knowledge after due investigation, is not in default in any material respect
under and has not breached in any material respect (i) any order, writ,
injunction or decree of any court or of any commission or other administrative
agency, or (ii) any material agreement or obligation to which Seller is a
party or by which Seller is bound, or to which Seller may be subject, or
affecting the Subject Interests or any portion thereof.
(e) There are no actions, suits or proceedings by or before any court,
arbitrator or any governmental commission, board, bureau or other
administrative agency pending, or to the knowledge of Seller threatened,
against Seller or any of the Subject Interests.
(f) The descriptions attached to the Conveyance as Exhibit A
completely and correctly describe the Subject Interests, and Seller's
ownership of the Subject Interests entitles Seller to a share of all
Hydrocarbons produced from or attributable to the Oil and gas leases located
on or under any of the lands described in Exhibit A to the Conveyance, and of
the proceeds of such production, after giving effect to and/or deducting all
applicable royalties, overriding royalties and other burdens or payments out
of production (except the Production Payment), which is not less than the
respective net revenue interests identified on Exhibit A to the Conveyance and
obligates Seller to pay a share of all costs of operation and development of
such Oil and gas leases which is not greater than the respective working
interests identified on Exhibit A to the Conveyance. Seller has good and
defensible title to the Subject Interests free and clear of any mortgage,
pledge, title retention lien, or other lien, encumbrance or security interest,
except for Permitted Liens. The Conveyance will assign to Purchaser good and
defensible title to the Production Payment free and clear of any mortgage,
pledge, title retention lien, or other lien, encumbrance or security interest,
except for Permitted Liens. Each lease and other interest in the Subject
Interests and the Production Payment is valid and in full force and effect,
all taxes, rentals, royalties and other amounts in respect thereof have been
paid and no default has occurred in respect of any such lease or interest
which would have a material adverse effect on the Production Payment.
(g) There are no preferential purchase rights, calls, rights of first
refusal or other similar rights or agreements in effect relating to any of the
Subject Interests.
(h) No Subject Interest is subject to a balancing, take-or-pay/make-up
or other arrangement under which one or more third parties may take a portion
of the Subject Interest Hydrocarbons without full payment therefore, in cash
or immediately available funds at the market price or value thereof, as a
result of Hydrocarbons having been taken from, or as a result of other actions
or inactions with respect to, the Subject Interests or other properties which
could reasonably be expected to have a material adverse effect on the
Production Payment.
(i) Seller has incurred no obligation or liability, contingent or
otherwise, for brokers' or finders' fees in respect of the matters provided
for in this Agreement.
(j) Seller has, to his knowledge after due investigation, complied
with all applicable statutes, rules, regulations, orders and restrictions of
any domestic or foreign government or any instrumentality or agency thereof,
having jurisdiction over the conduct of his businesses or any of his
properties, including, but not limited to, the Subject Interests. Seller has
not received any notice to the effect that Seller, his operations or his
properties, including, but not limited to, the Subject Interests, are not in
material compliance with any of the requirements of applicable Environmental
Laws, or are the subject of any federal or state investigations evaluating
whether any remedial action is needed to respond to a Release of any Hazardous
Material, whether from his properties, including, but not limited to, the
Subject Interests, or elsewhere.
(k) Except as disclosed in writing to Purchaser prior to the date
hereof, to the best of Seller's knowledge after due investigation, (i) all of
the Subject Interests and associated facilities operated by Seller have been,
and continue to be, owned, leased or operated by Seller in compliance with all
Environmental Laws; (ii) there have been no past, and there are no pending or
threatened claims, complaints, notices or inquiries to, or requests for
information received by, or known to Seller with respect to any alleged
violation of any Environmental Law; (iii) there are no pending or threatened
claims, complaints, notices or inquiries to, or requests for information
received by, or known to Seller for potential liability under any
Environmental Law or under any common law theories relating to operations or
the condition of any of the lands comprising the Subject Interests (including
underlying groundwater); (iv) there has been no Release of Hazardous Materials
at, on or under any of the lands comprising the Subject Interests; (v) Seller
has been issued and is in material compliance with all permits, certificates,
approvals, licenses and other authorizations relating to environmental matters
and necessary or desirable for his business and the operation of each of the
Subject Interests; (vi) none of the lands comprising the Subject Interests or
any portion of any thereof are listed or proposed for listing on the National
Priorities List pursuant to CERCLA, on the Comprehensive Environmental
Response Compensation Liability Information System List ("CERCLIS") or on any
other federal or state list of sites requiring investigation or clean-up;
(vii) there are no underground storage tanks, active or abandoned, including
petroleum storage tanks, on or under any of the lands comprising the Subject
Interests; (viii) Seller has not directly transported or directly arranged for
the transportation of any Hazardous Material (except crude oil and/or natural
gas sold in the ordinary course of business which has not created any material
liability or obligation of Seller) to any location which is listed or proposed
for listing on the National Priorities List pursuant to CERCLA, on the CERCLIS
or on any federal or state list or which is the subject of any federal, state
or local enforcement action or other investigation which may lead to material
claims against Seller or any portion of any of the Subject Interests for any
remedial work, damage to natural resources or personal injury, including
claims under CERCLA; (ix) there are no polychlorinated biphenyls, radioactive
materials or friable asbestos present at any of the lands comprising the
Subject Interests; and (x) no condition exists at, on, under or in respect of
any of the lands comprising the Subject Interests or any portion of any
thereof which, with the passage of time, or the giving of notice or both,
would give rise to material liability under any Environmental Law.
Notwithstanding the foregoing, (a) Seller has made no inquiry concerning the
various prior surface owners and operators or prior operators of the lands
comprising the Subject Interests regarding the possible existence of any
storage tanks, polychlorinated biphenyls, radioactive materials or friable
asbestos or other conditions resulting from surface operations or oil and gas
operations before Seller owned or operated the respective Subject Interests,
and Seller shall have no liability to Purchaser for breach of the foregoing
representation as a result of the existence of any storage tanks,
polychlorinated biphenyls, radioactive materials, friable asbestos or other
conditions resulting from surface operations or oil and gas operations before
Seller owned or operated the respective Subject Interests, and (b) there may
be some Naturally Occurring Radioactive Materials (NORM) produced as a result
of operations of the Subject Interests, but such NORM is being handled in
accordance with applicable regulations.
(l) [Intentionally omitted].
(m) All material factual information heretofore or contemporaneously
furnished by or on behalf of Seller to Purchaser for purposes of or in
connection with this Agreement or the other Production Payment Documents or
any transaction contemplated hereby or thereby, including, but not limited to,
factual data supporting any reserve reports and financial statements, is,
true, correct and accurate on the date as of which such information is dated
or certified and does not contain any material misstatement of fact or omit to
state a material fact or any fact necessary to make the statements contained
therein not misleading, and all estimated material so furnished was prepared
on the basis of assumptions, data, information, tests or conditions believed
to be valid or accurate or to exist at the time such material was prepared and
so furnished.
(n) Each Oil and gas lease and other interest described in Exhibit A
to the Conveyance is valid and subsisting and in full force and effect,
insofar as it covers or relates to the interests in land referred to or
described in Exhibit A thereto as covered thereby; all material agreements,
contracts, leases, permits, easements, rights-of-way, and other surface use
rights necessary to own, maintain and operate such oil and gas leases are in
full force and effect and to the knowledge of Seller after due investigation,
no material breach or default exists thereunder.
(o) To the knowledge of Seller after due investigation, all rentals,
royalties and taxes and other amounts due and payable under or in respect of
said Oil and gas leases and other interests, or any of them, have been duly
paid or provided for. No material default or event of default now exists
under any of said leases and other interests and Seller has received no notice
of any default or event of default or breach or claimed default or breach in
respect of any thereof.
(p) Seller is not obligated, by virtue of any prepayment made under
any "take-or-pay" clause or under any similar arrangement, to deliver Subject
Hydrocarbons at some future time without then receiving full payment therefore
at the market price or value thereof.
(q) The production of all Hydrocarbons which have heretofore been
produced from the Subject Interests has not been in excess of allowable
production quotas allowed or permitted to the Subject Interests by any
applicable regulatory authority so as to subject, after the Effective Date,
any well located thereon, or Purchaser's interest in the production therefrom,
to restrictions or penalties on allowables for overproduction.
(r) Except for contracts which may be terminated on not more than 90
days prior notice, and the sales contracts contemplated by this Agreement,
none of the Subject Hydrocarbons are committed or dedicated to any contract or
agreement regarding the sale or use thereof, other than as described in
Exhibit A to the Conveyance.
(s) None of the Subject Interests or any of the Subject Hydrocarbons
is subject to, or encumbered by, any balancing, deferred production,
hydrocarbon banking or similar arrangement.
(t) The Subject Interests include and cover all of the properties,
rights and interests of Seller for which oil and gas reserves and the future
production and revenues therefrom were estimated and projected in (i) those
certain internal reports by Purchaser, dated October, 1997, which have
heretofore been delivered by Purchaser to Seller and reviewed by Seller, and
(ii) that certain report by Broschat Engineering and Management Services,
dated October 7, 1997, which has heretofore been delivered by Seller to
Purchaser.
Section 4 Representations and Warranties of Purchaser. Purchaser
represents and warrants to Seller that:
(a) Purchaser is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, has the power to carry
on its business as it is now being conducted and is duly qualified to do
business and in good standing in all states where such qualification is
necessary and where failure to be so qualified or in good standing would have
a material adverse effect on its business or financial condition.
(b) The consummation of the transactions contemplated by this
Agreement and the other Production Payment Documents are within Purchaser's
corporate powers, have been duly authorized by all necessary corporate action,
and do not and will not contravene or conflict with any provision of the
articles of incorporation or bylaws of Purchaser, and do not and will not
result in the breach or termination of any term or provision of, or constitute
a default under, any indenture, mortgage, deed of trust or other agreement or
instrument to which Purchaser is a party or by which it or its properties may
be bound.
(c) Purchaser has incurred no obligation or liability, contingent or
otherwise, for brokers' or finders' fees in respect of the matters provided
for in this Agreement which could result in: (i) a lien on any of the Subject
Interests or (ii) any obligation or liability of Seller.
Section 5 Covenants.
(a) Covenants Pending Closing. From and after the date of this
Agreement until the Closing Date, Seller will:
(i) not, without the prior written consent of Purchaser and
except for the sale of the Production Payment and the Residual
Hydrocarbons to Purchaser (or an affiliate of Purchaser) and the sale of
Hydrocarbons and gas severed before the Effective Date, enter into any
agreement selling, transferring or encumbering the Subject Interests or
any part thereof or interest therein;
(ii) not, without the prior written consent of Purchaser, create
or permit to exist any mortgage, pledge, title retention lien, or other
lien, encumbrance or security interest with respect to any of the
Subject Interests except the Permitted Liens;
(iii) cause the Subject Interests to be maintained, developed,
protected against drainage, and continuously operated for the production
of Hydrocarbons in a good and workmanlike manner, as would a prudent
operator, all in accordance with generally accepted practices,
applicable operating agreements, and all applicable federal, state and
local laws, rules and regulations (including, without limitation, all
Environmental Laws), excepting those being contested in good faith;
(iv) give prompt notice to Purchaser of any notice of default
received by Seller on or subsequent to the date of this Agreement under
any instrument or agreement relating to the Subject Interests to which
Seller is a party or by which Seller is bound; and
(v) furnish Purchaser promptly with such additional internal
reports and engineering studies on the Subject Interests with respect to
oil reserves, projections of the rate of production and net operating
income, gross proceeds and prices received by Seller from the sale of
oil and incremental drilling, acquisition activity and other operations,
as Purchaser may reasonably request.
(b) Undertaking. Subject to events of Force Majeure, Seller hereby
unconditionally and irrevocably undertakes to diligently and timely perform
and observe all of the covenants to be performed or observed by Seller under
the Conveyance.
(c) Taking in Kind. The Production Payment Hydrocarbons shall be
delivered to Purchaser in kind or to the credit of Purchaser, free of cost, at
the Delivery Points in accordance with the Conveyance. Seller agrees to so
deliver Production Payment Hydrocarbons consisting of Oil prior to delivery of
other Subject Hydrocarbons, and Purchaser and Seller agree to allocate all
Hydrocarbons produced from the Subject Interests in accordance with Section
2.1 and Section 3 of the Conveyance and the definitions in Annex VII of this
Purchase Agreement.
(d) Gathering and Transportation and Other Services. Seller at his
sole cost and expense shall gather or cause to be gathered all Production
Payment Hydrocarbons and Residual Hydrocarbons at the wellheads where produced
and shall transport and deliver the same to the Delivery Points, without any
charge or deduction to Purchaser for any costs attributable to preparing the
Hydrocarbons for delivery, and delivering same to the Delivery Points.
(e) Material Negative Reservoir Event. Seller shall notify Purchaser
promptly after becoming aware that any event or circumstance which has
occurred or exists could reasonably be expected to become or constitute a
Material Negative Reservoir Event.
(f) Reports. Seller shall furnish or cause to be furnished to
Purchaser copies of the following information and agrees that Purchaser can
furnish copies of such information and any other information Purchaser obtains
under or pursuant to or in connection with this Agreement, any of the other
Production Payment Documents, or the Subject Interests, to the Servicer and to
any purchaser of Subject Hydrocarbons from Purchaser, provided however, that
Seller may require any Person receiving such data to sign a reasonable
confidentiality agreement prior to receiving such data:
(i) As soon as available and in any event within 90 days after
each calendar year ending December 31 (commencing December 31, 1997),
consolidated audited financial statements of Seller, including, without
limitation, a consolidated balance sheet as of the end of such annual
period and consolidated statements of earnings and cash flow of Seller
for such annual period, prepared in accordance with GAAP;
(ii) As soon as available and in any event within 45 days after
each calendar quarter (commencing March 31, 1998), consolidated
financial statements of Seller, including, without limitation, a
consolidated balance sheet as of the end of such calendar quarter and
consolidated statements of earnings and cash flow of Seller for such
calendar quarter, prepared in accordance with GAAP;
(iii) At such times as may be reasonably requested by Purchaser,
but not more often than twice annually, reports concerning any material
change in methods of treatment or operation of all or any wells on
Subject Interests and production of Subject Hydrocarbons, any drilling
or development, any method of secondary or tertiary recovery, or any
other action with respect to the Subject Interests, the decision as to
which may increase or reduce the quantity of Hydrocarbons ultimately
recoverable from the Subject Interests, or the rate of production
therefrom, or which may shorten or lengthen the period of time required
for liquidation of the Production Payment;
(iv) As from time to time reasonably requested by Purchaser, but
not more often than twice annually, copies of maps showing property
lines and well locations, well logs, core analysis, flow and pressure
tests, natural gas analysis and casing programs and other technical
information related to the Subject Interests and the wells thereon and
the production therefrom; provided that Seller shall only be required to
give Purchaser access (not copies) during normal business hours to any
such material which is subject to a confidentiality agreement or license
in effect on the date hereof which prohibits Seller from delivering a
copy of such information to Purchaser, or interpretative data which
Seller reasonably deems to be proprietary and confidential, and Seller
may require Purchaser and its representatives and designees to sign
reasonable confidentiality agreements restricting their use of any such
proprietary or confidential interpretive information in competition
against Seller;
(v) Together with the delivery of the financial statements
delivered pursuant to the foregoing clauses (i) or (ii) of this Section
5(f), a certificate executed by Seller certifying that to his knowledge
after due investigation, Seller is in compliance in all material
respects with the covenants within this Agreement and the Conveyance, or
if not, specifying any exceptions thereto in reasonable detail;
(vi) Promptly after December 31 of each calendar year (commencing
December 31, 1997), and in any event not later than March 15 of each
calendar year, reports in form and substance satisfactory to Purchaser
and using pricing, engineering and other assumptions acceptable to
Purchaser, prepared by independent petroleum engineers acceptable to
Purchaser (it being agreed for purposes hereof that Broschat Engineering
and Management Services is acceptable) as of December 31 of the
preceding calendar year concerning (a) the quantity of Subject
Hydrocarbons recoverable from the Subject Interests, (b) the projected
income and expense attributable to the Subject Interests, (c) such other
customary reserve information, technical or otherwise, as Purchaser may
reasonably request including a discussion of the materials reviewed in
preparing such report and all written opinions prepared, if any,
regarding the Subject Interests or any portion thereof (the "Independent
Reserve Report"); and
(vii) As soon as available and in any event within 45 days after
the end of each month, a Monthly Hydrocarbons Report in substantially
the form attached hereto as Annex III, in form and substance
satisfactory to Purchaser.
(viii)Immediately, notice of the occurrence of any Event of
Default or any other default under any material agreement entered into
by Seller.
(g) Use of Proceeds. Seller shall not use the Production Payment or
proceeds therefrom to pay any cost, expense or otherwise except in connection
with Seller's oil and gas exploration, development and production business.
(h) Tangible Net Worth. The parties signing this Agreement as Seller
will not at any time permit their aggregate Tangible Net Worth to be less than
$3,500,000. As used herein, "Tangible Net Worth" means the consolidated net
worth of Seller after subtracting therefrom the aggregate amount of any
intangible assets of Seller, including goodwill, franchises, licenses,
patents, trademarks, trade names, copyrights, service marks and brand names.
(i) Indebtedness. Except with the consent of Purchaser, which consent
will not be unreasonably withheld, Seller will not create, incur, assume or
suffer to exist or otherwise become or be liable in respect of any
Indebtedness related to or in connection with the Subject Interests, other
than, without duplication, (a) Indebtedness in respect of the Production
Payment pursuant to this Agreement and the other Production Payment Documents;
(b) unsecured Indebtedness incurred in the ordinary course of business
(including open accounts extended by suppliers on normal trade terms in
connection with purchases or furnishing of goods and services, but excluding
Indebtedness incurred through the borrowing of money or Contingent
Liabilities); (c) Indebtedness secured by assets other than the Subject
Interests; or (d) Indebtedness in respect of or in connection with Taxes and
Fees.
(j) Loans. Seller shall not use the proceeds from the sale of the
Production Payment to make any loans or advance any monies to any employee,
consultant or agent of Seller.
(k) Insurance. Seller will maintain with financially sound and
reputable insurance companies such insurance in amount and type and against
such risks, liabilities, casualties and contingencies as is maintained by
prudent Persons in the industry (and which property insurance shall name
Purchaser as an additional insured as its interest may appear and shall
contain endorsements to such policies providing that the insurer will notify
Purchaser not less than 30 days prior to the expiration or termination of such
policies), including, without limitation, (1) the insurance set forth in Annex
VI hereto and (2) to the extent such insurance is carried by others engaged in
similar undertakings in the same general area or areas in which the Subject
Interests are located, insurance on all personal property and fixtures used in
connection with the operation of the Subject Interests, against loss or damage
by fire, lightning, hail, tornado, explosion, hurricane and other similar
risks. Seller shall furnish or cause to be furnished to Purchaser prior to
the Closing Date and, upon the request of Purchaser, from time to time
thereafter, a summary of the insurance coverage of Seller in form and
substance satisfactory to Purchaser in its sole discretion and copies of all
applicable insurance policies.
(l) Accounting Principles. Seller will prepare all reports and
computations required under this Agreement or the other Production Payment
Documents, all in accordance with generally accepted accounting principles
("GAAP") which are customary and acceptable in the oil and gas exploration and
production industry for corporations using full cost accounting methods.
Seller will keep and maintain all books, records and other information
pertaining to Seller or the Subject Interests, and provide such other
information as Purchaser may request from time to time in accordance with
accurate accounting standards customary and acceptable in the oil and gas
exploration and production industry for companies using full cost accounting
methods.
(m) Other Agreements. Seller will not enter into any agreement
containing any provision which would be violated or breached by the
performance of his obligations hereunder or under any instrument or document
delivered or to be delivered by Seller hereunder or in connection herewith.
(n) Plan of Development. Except as may otherwise be approved by
Purchaser, in its sole and absolute discretion, Seller shall comply with, and
perform any and all obligations and actions set forth in, the terms and
provisions of the Plan of Development.
(o) Early Delivery. Without the prior written consent of Purchaser,
Seller shall not deliver to Purchaser any volume of Production Payment
Hydrocarbons prior to the scheduled delivery date set forth in the Production
Schedule. In no event shall either Seller or Purchaser have any obligation to
consent to early delivery of Production Payment Hydrocarbons.
(p) Taxes.
(i) Seller shall pay, promptly when due, except as contested in
good faith and by appropriate proceedings, together with interest and
penalties thereon, if any, all taxes owed by Seller (whether by
operation of law or pursuant to this Agreement), including those set
forth below:
A. All ad valorem taxes (or taxes imposed in lieu
thereof) imposed upon or assessed with respect to or charged
against the Production Payment or upon the Subject Interests or
the Subject Hydrocarbons or the Production Payment or the
Production Payment Hydrocarbons, or against Purchaser by reason of
its ownership of the Production Payment (other than any taxes
imposed upon or assessed with respect to the net income of
Purchaser and any franchise taxes of Purchaser);
B. All Production Taxes imposed upon or with respect to
or measured by or charged against the Production Payment or the
Production Payment Hydrocarbons; and;
C. All other taxes, duties, imposts, charges, levies and
assessments of any kind or nature whatsoever, imposed upon or
assessed with respect to or charged against the Production
Payment, or upon the Subject Interests or the Subject Hydrocarbons
or the Production Payment Hydrocarbons, or against Purchaser by
reason of its ownership of the Production Payment or otherwise
(other than any taxes levied on the net income of Purchaser and
franchise taxes of Purchaser);
(ii) Notwithstanding the foregoing, Seller shall not be
responsible or liable to Purchaser for, and there shall not be included
in the Makeup Volume Balance or otherwise, amounts in respect of any
taxes associated with the handling, transportation, refining, purchase
or sale of Production Payment Hydrocarbons after they have been
delivered to Purchaser or to Oil Buyer or another transporter for the
credit of Purchaser.
(iii) Unless the parties agree in writing otherwise, severance
taxes shall be remitted to the State by the Oil Buyer, who shall
purchase severed Hydrocarbons under the Crude Oil Purchase Agreement,
and Seller shall not be liable or responsible under this Purchase
Agreement or the Conveyance for any penalties, interest or other costs,
expenses or liability (except for the principal tax liability itself)
arising out of any default by the Oil Buyer in making a proper
remittance of severance taxes, unless such default shall have been
caused by a material error or omission of Seller.
(iv) Purchaser shall promptly provide Seller, or Seller's
designee, with statements, notices and other information received by
Purchaser regarding ad valorem taxes assessed against Purchaser's
interest which Seller is obligated to pay on behalf of Purchaser, as set
forth in this Purchase Agreement or the Conveyance, and Seller shall not
be liable or responsible under this Purchase Agreement or the Conveyance
for any failure to pay taxes for which it did not receive proper and
timely notice, or for any increased taxes, penalties or interest owed as
a result of Purchaser's failure to promptly provide Seller or Seller's
designee with such tax statements, notices or other information.
(q) Delivery to Purchaser. The Production Payment Hydrocarbons shall
be delivered at the sole cost of Seller to Purchaser, or to the credit of
Purchaser, into the facilities of Purchaser or its designee at the Delivery
Points (or, with Seller's and Purchaser's prior mutual consent in their
discretion, the Alternate Delivery Points). As between Seller and Purchaser,
Seller shall be in exclusive control and possession of the Production Payment
Hydrocarbons deliverable under the Conveyance and responsible for any loss,
damage or injury caused thereby until the same shall have been delivered to
Purchaser at the Delivery Point(s) or Alternate Delivery Point(s), as the case
may be, after which delivery Purchaser shall be deemed to be in exclusive
control and possession thereof and responsible for any loss, injury or damage
caused thereby.
(r) Operation of Subject Interests. So long as the Production Payment
shall remain in force, Seller shall, as an independent contractor and at
Seller's own cost and expense:
(i) Cause the Subject Interests to be maintained and
continuously operated for the production of Hydrocarbons in a good and
workmanlike manner, as would a prudent operator (without regard to the
existence of the Production Payment), all in accordance with generally
accepted practices in all material respects, applicable operating
agreements, and applicable federal, state and local laws, rules and
regulations (including, without limitation, all Environmental Laws),
excepting those being contested in good faith;
(ii) Pay, or cause to be paid, promptly as and when due and
payable, (A) all rentals, royalties and proceeds payable to the other
mineral interest owners in respect of the Subject Interests or the
Subject Hydrocarbons, excepting those being contested in good faith and
(B) all Production Expenses incurred in or arising from the operation or
development of the Subject Interests, or the producing, treating,
gathering, or storing, of the Subject Hydrocarbons; excepting those
being contested in good faith or those not yet payable in the ordinary
course of business;
(iii) Cause machinery, equipment and facilities necessary for the
production of the Production Payment Hydrocarbons to be kept in
effective operating condition as would a prudent operator (without
regard to the existence of the Production Payment) and cause necessary
repairs, renovations or replacements thereof or thereto to be promptly
made;
(iv) Give or cause to be given to Purchaser written notice of
every adverse claim or demand made by any Person (other than the
Purchaser or the Oil Buyer) affecting the Subject Interests or the
Subject Hydrocarbons which could have a material adverse effect on the
Production Payment or any portion thereof or on Seller, and of any suit
or other legal proceeding instituted with respect thereto, and cause
necessary steps to be taken with reasonable diligence to protect and
defend the Subject Interests and the Subject Hydrocarbons against any
such adverse claim or demand which could have a material adverse effect
on the Production Payment, or any portion thereof, or Seller, including
(but not limited to) the employment of counsel for the prosecution or
defense of litigation;
(v) Cause the Subject Interests to be kept free and clear of
liens, other than Permitted Liens;
(s) Access to Subject Interests. Seller will permit the duly
authorized representatives of Purchaser at reasonable times and upon
reasonable notice, but at Purchaser's sole risk and expense, to make such
inspection of the Subject Interests and the machinery, equipment and
facilities used in the operation thereof as such representatives shall deem
proper. Seller may have one or more representatives accompany Purchaser's
representatives during such inspection.
(t) Certain Notices. During the term hereof, Seller will not change
his name, identity, principal place of business or the office where Seller
keeps his books and records concerning the Production Payment, the Production
Sale Contracts and the contract rights and accounts now existing or hereafter
arising in connection therewith without notifying Purchaser of any such change
at least 30 days prior to the effective date of such change.
(u) Further Assurances and Warranty. Seller and Purchaser will
execute and deliver all such other and additional instruments, notices,
releases and other documents and will do all such other acts and things as may
be necessary or appropriate more fully to assign to each other party or its
successors or assigns all of the respective rights and interests herein and
hereby granted or intended so to be. Seller will warrant and forever defend
the Production Payment unto Purchaser, its successors and assigns, against
every person whomsoever now or at any time hereafter lawfully claiming the
same or any part thereof.
(v) Measurement and Quality.
(i) Measurement of the volume of Production Payment Hydrocarbons
delivered under the Conveyance shall be made at the existing metering
points at the Delivery Points or Alternate Delivery Points, determined
in accordance with the Crude Oil Purchase Agreement referenced in
Section 2 above.
(ii) All Production Payment Hydrocarbons delivered to Purchaser,
or to Purchaser's credit, shall satisfy the Quality Standards. All
costs and expenses of treating the Hydrocarbons to satisfy the Quality
Standards shall be borne and paid by Seller, provided however, that
Seller's only liability for delivery of any Hydrocarbons which do not
meet the Quality Standards shall be for the Quality Adjustment Amount
within the Make-Up Volume Balance, and Seller shall not be personally
liable to Purchaser for any such amounts.
(w) Abandonment of Wellbores or Conduct of Certain Operations. So
long as the Production Payment remains in force, Seller shall not, without
first obtaining the written consent of Purchaser which consent shall not be
unreasonably withheld, (1) abandon any wellbore on the Subject Interests which
is capable of producing in paying quantities heretofore or hereafter completed
for production of Hydrocarbons on any of the lands described in Exhibit A to
the Conveyance; or (2) conduct any work or operation related to any zone,
horizon, formation or interval included in the Subject Interests.
For all purposes of this Agreement and of the Conveyance (1) a well
shall be deemed to be capable of producing Hydrocarbons "in paying quantities"
unless and until there arises a condition, which reasonably appears to be
permanent, such that the aggregate value of the Subject Hydrocarbons which are
being produced or will be produced from such well (without considering the
effect of the Production Payment) no longer exceeds or will not exceed the
costs and expenses directly related to the operation and maintenance of such
well (excluding indirect office and management overhead and similar charges
exceeding $500 per month).
(x) Mortgage or Transfer or Resignation as Operator of any Subject
Interest. So long as the Production Payment remains in force, Seller shall
not, without first obtaining the written consent of Purchaser which consent
shall not be unreasonably withheld (1) sell, assign, lease, mortgage,
hypothecate, pledge, or otherwise transfer Seller's interest in any of the
Subject Interests, either in whole or in part, and any purported sale,
assignment, lease, mortgage or hypothecation or other transfer in
contravention hereof shall be null and void; or (2) resign as operator of any
of the Subject Interests operated by Seller unless the successor operator has
been approved in writing by Purchaser or, following the occurrence of an Event
of Default, Purchaser shall have requested in writing such resignation.
(y) Covenants of Purchaser. Purchaser agrees that:
(i) Purchaser shall not include any expense in excess of $1,000
within the Expense Amounts in the Make-Up Volume Balance except under
the following conditions:
A. Purchaser may incur or pay any reasonable expense and
include such expenses within the Expense Amount whenever:
(I) Such expenses are incurred as a part of, or as a
consequence of, Purchaser's authorized exercise of remedies
after an Event of Default pursuant to Section 15 hereof
provided that such expenses are reasonably incurred under
the circumstances,
(II) Purchaser's failure to pay or incur such expenses
might reasonably be expected to result in civil fines or
penalties in excess of $1,000 or
(III) Purchaser's failure to pay or incur such expenses
might reasonably be expected to result in criminal liability
of Purchaser or any other Indemnified Party or to criminal
fines or penalties.
B. At least 30 days prior to incurrence by Purchaser of any
expense in excess of $1,000 to be included within the Expense
Amounts other than an expense pursuant to the foregoing clause
(A), Purchaser shall notify Seller in writing of its intention to
incur such expense, setting forth in reasonable detail the
expenses so intended to be incurred and the date on or after which
Purchaser may incur such expenses. If Seller contests the
inclusion of any such expenses within the Expense Amount, within
such 30 day period, Seller must provide Purchaser with notice of
its opposition and reasonable evidence of the payment by Seller of
such expenses or any other reasonable basis to support Seller's
opposition to inclusion of such amounts within the Expense Amount.
(ii) Purchaser shall not include any taxes, penalties or interest
thereon to be within the Tax Amount in the Make-Up Volume Balance except
under the following conditions:
A. Seller is obligated to pay such taxes, penalties or interest
but has failed to make timely and proper payment of such taxes,
and
B. At least 30 days prior to the payment thereof, Purchaser
shall notify Seller in writing of its intention to pay such taxes,
setting forth in reasonable detail the taxes so intended to be
paid and the date on or after which Purchaser may pay such taxes.
If Seller contests the inclusion of any such taxes within the Tax
Amount, then within such 30 day period, and to prevent the payment
thereof by Purchaser, Seller must provide Purchaser with notice of
its opposition and reasonable evidence of either:
(I) the payment by Seller of such taxes, penalties or
interest; or
(II) Sellers' active contest of the validity, applicability
or amount of such tax, penalties or interest in good faith
by appropriate proceedings diligently pursued so that ten
(10) days have not elapsed following the completion or the
abandonment of the contest of same; or
(III) Any other reasonable basis to justify Seller's
opposition to payment of such Taxes by Purchaser and the
inclusion of such amounts within the Tax Amount.
(iii) Purchaser shall have no obligation to pay any expenses or
taxes, even if it gives Seller the notice provided in this Section.
(iv) Purchaser will provide Seller promptly after its receipt of
the Monthly Hydrocarbon Report prepared by Seller a report substantially
in the form of Annex VIII attached hereto (the "Purchaser's Monthly
Report"); provided, however, Purchaser shall have no liability for its
failure to timely deliver Purchaser's Monthly Report and any failure to
deliver Purchaser's Monthly Report shall not in any way relieve Seller
of its obligation to deliver Production Payment Hydrocarbons pursuant to
the Production Payment Documents.
(v) Within 30 days after incurring any costs, expenses or taxes
to be included within the Make-Up Volume Balance, Purchaser shall notify
Seller of the nature and amount of such cost, expense or taxes and the
basis for Purchaser's incurring the same.
Section 6 Closing Date and Place. The Closing shall take place at
such time and place as shall be mutually agreed upon.
Section 7 Transactions on and After the Closing Date. On the Closing
Date, Seller shall execute and deliver the Conveyance to Purchaser,
substantially in the form annexed hereto as Annex I, in such number of
counterparts as Purchaser may request together with the other instruments and
documents required pursuant to Section 12. Concurrently with such delivery,
Purchaser shall make payment of the Purchase Price in immediately available
funds by wire transfer as set forth on Annex IV hereto, which payments shall
be deemed to constitute payment to Seller of the Purchase Price.
Section 8 Audit. Purchaser and its agents, or consultants shall have
the right from time to time during the term of the Conveyance and for 24
calendar months thereafter, at Purchaser's or Oil Buyer's expense, to examine
and to audit at any reasonable time the books, records and charts of Seller
with respect to the Subject Interests, including, without limitation, all
information with respect to volumes of Hydrocarbons produced from the leases,
the calculation of Lease Use Hydrocarbons and Non-Consent Hydrocarbons, and
the payment by Seller of all costs and expenses incurred in connection with
the Subject Interests. This right to audit shall be a free and unrestricted
right, and shall survive the termination of the Conveyance; provided that
Seller shall not be required to maintain books, records or charts for a period
of more than 24 calendar months following the calendar year in which the
Production Payment is discharged. If, as a result of any such audit, it is
determined that any amount is due Purchaser as a result of the failure of
Seller to properly deliver all Production Payment Hydrocarbons, or the
proceeds thereof, to Purchaser in accordance with the terms of the Conveyance
and this Agreement, Seller shall either (i) pay Purchaser the value of the
Production Payment Hydrocarbons or (ii) deliver to Purchaser the Production
Payment Hydrocarbons, which Seller failed to deliver, or the proceeds which
Seller failed to remit, together with interest at the Specified Rate from the
date that such amount should have been delivered or paid in accordance with
the terms of the Conveyance and this Agreement to the date of payment. Upon
request, Seller shall also make available to Purchaser for audit purposes any
relevant records of Seller's transporter(s) to which Seller has access. A
formal audit of accounts shall not be made more often than once each calendar
year, and Seller shall have the right to require that a single audit be
conducted on behalf of all parties entitled to an audit in any given year.
Any inaccuracy will be promptly corrected when discovered; provided, however,
that Purchaser shall not have any right to question or contest any charge or
credit if the matter is not called to the attention of Seller in writing
within 24 calendar months after the end of the calendar year in which the
Production Payment is discharged. Notwithstanding the foregoing, the
Purchaser and its agents or consultants shall not have the right hereunder to
examine or audit the books, records or charts of the Seller which relate to
matters other than the Subject Interests and the Production Payment or to
examine privileged attorney-client communications or attorney work product.
Section 9 Obligations Absolute. Seller shall employ and have
supervision over the personnel required by Seller to perform his services and
responsibilities hereunder and Seller shall pay all expenses in connection
therewith. The obligations of Seller and Purchaser hereunder shall be
absolute and unconditional, it being understood that the obligations of Seller
shall be absolute and unconditional under any and all circumstances, subject
to events of Force Majeure. Without in any way limiting the foregoing, but
subject to Section 26 hereof, Purchaser may, from time to time, without notice
to Seller, assign or transfer the benefits of this Agreement; and,
notwithstanding any such assignment or transfer or any subsequent assignment
or transfer thereof, each and every immediate and successive assignee or
transferee shall, to the extent of the interest of such assignee or transferee
in such liabilities, be entitled to the benefits of this Agreement to the same
extent as if such assignee or transferee were Purchaser.
Section 10 Conditions to Obligations of Parties. The obligations of
each party under this Agreement are subject to the satisfaction (or waiver by
both parties) on or prior to the Closing Date of the following conditions:
(a) There shall not have been any legislation enacted or voted by
either House of the Congress of the United States of America nor any
regulation promulgated by the Secretary of the Treasury or the Internal
Revenue Service after the date of this Agreement and prior to the Closing Date
which in the judgment of tax counsel for such party would materially adversely
affect the income tax consequences to such party of the transactions
contemplated by this Agreement.
(b) All necessary permissions, approvals and consents of third parties
or governmental agencies, if any, with respect to the sale and transfer of the
Production Payment shall have been delivered to the parties hereto.
Section 11 Conditions to Obligations of Seller. The obligations of
Seller under this Agreement are subject to the satisfaction (or waiver by
Seller) on or prior to the Closing Date of the following additional covenants:
(a) Purchaser shall have performed all agreements and covenants
required by this Agreement and the other Production Payment Documents to be
performed by it, and all representations and warranties herein made by
Purchaser shall be true in all material respects as of the Closing Date, and
Seller shall have received a certificate to that effect signed by Purchaser.
(b) Purchaser shall have executed and delivered this Agreement, the
Conveyance in substantially the form set forth in Annex I hereto, and all
other Production Payment Documents, all in form and substance satisfactory to
Seller in its sole discretion.
Section 12 Conditions to Obligations of Purchaser. Obligations of
Purchaser under this Agreement are subject to the satisfaction (or waiver by
Purchaser) on or prior to the Closing Date of the following additional
conditions:
(a) All legal matters in connection with this Agreement and the
transaction contemplated hereby shall be acceptable to Purchaser in its sole
discretion.
(b) Purchaser shall have received from Seller a certificate, dated the
date of Closing Date, of its Secretary as to (i) resolutions of its board of
directors then in full force and effect authorizing the execution, delivery
and performance of this Purchase Agreement and each other Production Payment
Document; (ii) copies of the articles of incorporation of Seller, together
with all amendments thereto; (iii) copies of the by-laws of Seller, together
with all amendments thereto; (iv) the incumbency and signatories of those of
its officers authorized to act with respect to this Purchase Agreement and
each other Production Payment Document executed by it, upon which certificate
Purchaser may conclusively rely until it shall have received a further
certificate of the Secretary of Seller canceling or amending such prior
certificate; and (v) copies of certificates of good standing and existence of
the Seller in its jurisdiction of incorporation and North Dakota.
(c) Seller shall have obtained all necessary consents, approvals and
permits, if any, from all federal and state regulatory agencies, governmental
authorities and from any other Persons, in form and substance satisfactory to
Purchaser in its sole discretion, Purchaser shall have received copies of all
such consents, approvals and permits, and such consents, approvals and permits
shall be in full force and effect on the Closing Date, and Purchaser shall
have received a certificate to that effect signed by Seller as to matters
within Seller's knowledge after due investigation;
(d) Seller shall have performed all agreements and covenants required
by this Agreement and by the other Production Payment Documents to be
performed by Seller, and all representations and warranties herein and in the
other Production Payment Documents made by Seller shall be true and correct as
of the Closing Date, and Purchaser shall have received a certificate to that
effect signed by Seller as to Seller's knowledge after due investigation.
(e) Seller shall have executed and delivered this Agreement, the
Conveyance in substantially the form set forth in Annex I hereto, and all
other Production Payment Documents, all in form and substance acceptable to
Purchaser in its sole discretion.
(f) Purchaser shall have received financial statements, including,
without limitation, a statement of cash flow of Seller, a statement of
accounts payable of Seller, and a detailed monthly statement (for prior three
(3) month period) of operating expenses and overhead expenses, banking and
trade references and credit and other due diligence relating to Seller and the
Subject Interests, in form, substance, scope and methodology satisfactory to
Purchaser, in its sole discretion.
(g) All legal matters in connection with this Agreement and the
consummation of the transaction contemplated hereby shall be approved by
counsel for Purchaser, and there shall have been furnished to such counsel by
Seller such agreements, opinions of counsel, title or other records and
information as they may reasonably have requested for that purpose.
(h) Purchaser shall have received approval of the transaction
contemplated in this Purchase Agreement and the other Production Payment
Documents from Purchaser's senior management located in Wichita, Kansas.
(i) Purchaser shall have received, at Seller's expense, favorable
opinions of counsel satisfactory to Purchaser and licensed to practice in the
State in which the Subject Interests are located, in form and substance
satisfactory to Purchaser in its sole discretion regarding Seller's title to
those of the Subject Interests listed on Annex II hereto and located in such
State.
(j) Purchaser shall have received reserve data and completed an
environmental review satisfactory to Purchaser, in its sole discretion, and,
since the date of such review, there has been no material change in respect
thereof.
(k) No suit, action or other proceeding shall be pending to restrain,
enjoin or otherwise prevent the consummation of this Agreement or the
transactions contemplated in connection herewith or which may have any
material effect on the Subject Interests, and Purchaser shall have received a
certificate to that effect from Seller.
(l) Purchaser shall have received evidence, in form, substance, scope
and methodology satisfactory to Purchaser, in its sole discretion, that no
provision of the Production Payment Documents violates any term or provision
of that certain Credit Agreement, dated September 1, 1995, between Seller and
Norwest Bank Montana National Association.
(m) Seller and Purchaser shall have made satisfactory arrangements for
Purchaser to receive a $3,646 structuring fee out of the funds to be
distributed at Closing.
(n) No Default or Event of Default shall have occurred and be
continuing on the Closing Date either before or after giving effect to this
Agreement, the Conveyance or any other Production Payment Documents.
(o) Purchaser shall have received a copy of the 1996 Income Tax Return
of Seller, certified by Seller.
(p) Purchaser shall have received an insurance certificate summarizing
the insurance coverage of Seller, in form, substance, scope and methodology
satisfactory to Purchaser in its sole discretion.
Section 13 Recording. Concurrently with the Closing, Purchaser will,
at Seller's expense, record and/or file, or cause to be recorded and/or filed,
in the appropriate recording and/or filing offices in each county and State in
which any Subject Interest is located, an executed counterpart of (i) the
Conveyance and (ii) the Memorandum of Agreement relating to Purchase of Crude
Oil. This Agreement shall not be recorded.
Section 14 Amendments to Financings, etc Seller acknowledges, agrees
and consents that, at any time and from time to time: (a) any financing
arrangements of Purchaser may be incurred, amended, modified or supplemented
or replaced at any time in any respect whatsoever for any purpose whatsoever;
(b) Purchaser may sell, assign, transfer and otherwise deal in or with the
Subject Interests or its interest therein, as the same may at any time be
amended or modified, all without affecting this Agreement or the obligations
of Seller hereunder, but subject to the requirements of Section 26; provided,
however, that nothing in this Section shall expand the rights, obligations or
liabilities of either Seller or Purchaser under, or in any manner alter the
terms of, this Purchase Agreement, the Conveyance or any other Production
Payment Document.
Section 15 Remedies of Purchaser.
(a) (i) If an Event of Default shall have occurred as a result of (1)
a breach of warranty or representation as described under section A of
the definition of Event of Default, or (2) a material breach of a
covenant as described under section B of the definition of Event of
Default (other than in respect of payment), Purchaser shall, after
obtaining actual knowledge of such Event of Default, provide Seller with
written notice specifying in reasonable detail the Event of Default
which has occurred and stating that it intends to exercise remedies
provided in this Section. Seller shall have 30 days either (i) after
receipt of such notice to cure such default or (ii) after Seller should
have notified Purchaser of such Event of Default pursuant to Sections
5(a)(iv) and 5(f)(viii) hereof, to provide Purchaser with notice and
reasonable documentation that it has cured such Event of Default. If
Seller does not provide such proper notice and evidence, then Purchaser
may exercise the remedies set forth in paragraph B below of this
Section;
(ii) If an Event of Default shall have occurred as a result of
(1) a bankrupt or insolvent condition of Seller, as described under
section E of the definition of Event of Default, (2) the continued
existence of a Make-Up Volume balance above $100,000 as described under
section F of the definition of Event of Default, (3) a reduction of
production as described under section C of the definition of Event of
Default, (4) a Material Negative Reservoir Event as described under
section G of the definition of Event of Default, or (5) an unauthorized
cessation of Seller serving as operator as described under section D of
the definition of Event of Default or Section 5(v) hereof, then
Purchaser may exercise the remedies set forth in paragraph B of this
Section;
(iii) If an Event of Default shall have occurred as a result of a
material breach of a covenant as described under section B of the
definition of Event of Default, due to the failure by Seller to pay a
monetary amount owed, for which Purchaser would properly be entitled to
charge the Make-Up Volume Balance under Paragraph (y) of Section 5 of
this Purchase Agreement, and if Purchaser shall have paid any such
amount(s), Purchaser shall notify Seller in writing of such payment(s),
and if Seller does not fully reimburse Purchaser within 10 days of
receipt of such notice, Purchaser shall be entitled to exercise its
remedies under paragraph B of this Section.
(b) After the occurrence of an Event of Default, and a failure to cure
the same, as set forth in paragraph A of this Section, and in addition to
Purchaser's right to recover damages and all other remedies available to
Purchaser at law or in equity, Purchaser may (but is not obligated or required
to) exercise the following remedies. Purchaser may:
(i) perform or cause to be performed or pay at Seller's expense
the act or matter the failure of which resulted in the Event of Default,
in which event Purchaser may expend funds for such purpose,
(ii) after upon written notice to Seller, exercise all rights of
Seller with respect to the possession, operation and development of some
or all of the Subject Interests, including, without limitation, the
right to operate some or all of the Subject Interests,
(iii) exercise the right to notify the purchasers of the Subject
Hydrocarbons to make direct payment to Purchaser,
(iv) have the use, in connection with operating the Subject
Interests, of all of Seller's property, equipment, machinery and
facilities located thereon or used in connection therewith as then may
be useful or appropriate for the production, treating, storing, and
transporting of Subject Hydrocarbons, and Seller hereby grants to
Purchaser a non-exclusive easement and license to use any and all such
property, equipment, machinery and facilities including, without
limitation, all surface and subsurface machinery, goods, equipment,
fixtures, inventory, facilities, supplies or other property of
whatsoever kind or nature now or hereafter located on or under any of
the lands described in Exhibit A to the Conveyance, including, but not
by way of limitation, all oil wells, gas wells, water wells, injection
wells, pumping units and engines, christmas trees, platforms,
separators, compressors, tanks, gas systems, pipelines, water systems,
power plants, communication systems, roads, loading racks and shipping
facilities, and all other properties, rights, titles, interests and
things of value, to the extent the same are transferable, including,
without limitation, all operating agreements, processing agreements,
farmin agreements, farmout agreements, joint venture agreements,
exploration agreements, bottom hole agreements, dryhole agreements,
support agreements, acreage contribution agreements, insurance policies,
title opinions, title abstracts, title materials and information, files,
records, data bases, information systems, logs, well cores, fluid
samples, production data and reports, well testing data and reports,
maps, seismic and geophysical, geological and chemical data and
information, interpretative and analytical reports of any kind or
nature, computer hardware and software and all documentation therefore
or relating thereto (including, without limitation, all licenses
relating to or covering such computer hardware, software and/or
documentation), rights-of-way, easements, servitudes, surface leases,
permits, licenses, subject, however, to the restrictions, exceptions,
reservations, and other matters, if any, set forth in the specific
descriptions of said properties and interests in such Exhibit A
(including the presently existing and valid royalties, overiding
royalties, payments out of production, oil and gas sales, purchase,
exchange and processing contracts, and all other contracts and other
instruments and matters, referred to in such Exhibit A), and
(v) on behalf of and for the account of Seller, sell or utilize
all of the Subject Hydrocarbons and apply the proceeds thereof
attributable to Seller's interest therein to the costs and expenses of
the operation and development of the Subject Interests and to reimburse
Purchaser for any amounts so expended by Purchaser,
(vi) request and require Seller to resign as operator of the
Subject Interests and take all actions necessary to replace Seller as
operator including, without limitation, replacing Seller with Purchaser
or any of its Affiliates; provided that Seller shall remain obligated
for all obligations, costs and expenses arising from operating the
Subject Interests not reimbursed through the proceeds of production of
such Subject Interests other than Production Payment Hydrocarbons.
(c) After the occurrence of an Event of Default, and Seller's failure
to cure the same, as set forth in Paragraph (a) of this Section, Seller shall:
(i) reimburse Purchaser upon demand for all reasonable amounts
expended (including the fees and out-of-pocket expenses of counsel in
connection therewith) by Purchaser as a result of or in connection with
its exercise of remedies under Paragraph B of this Section, to the
extent that such amounts can be paid out of Seller's interest in the
proceeds from sale of Subject Hydrocarbons, together with interest on
such amounts at the Specified Rate, and
(ii) In addition to and not in limitation of the foregoing,
Purchaser shall have the option to accelerate or cause Seller to
accelerate the Production Schedule to include some or all of the
residual volumes, as necessary to repay the Scheduled Volumes and reduce
the Make-Up Volume Balance to zero. Such volumes shall be applied as
provided in Section 3 of the Conveyance. Purchaser's election to so
accelerate and the amount of such acceleration shall be at Purchaser's
sole discretion, but provided further, that if all Events of Default are
cured within 60 days of their occurrence, then such acceleration shall
cease to be effective, and the original schedule for delivery of
Scheduled Volumes shall resume.
(iii) Notwithstanding the foregoing provisions of this Section,
Purchaser will not exercise any of its rights pursuant to this Section
in respect of the Event of Default described in section G of the
definition of the term Event of Default in Annex VII, if within 30 days
of the occurrence of such Event of Default, Seller shall deliver to
Purchaser an Independent Reserve Report meeting the requirements of
Section 5(f)(vi) hereof and otherwise in form and substance satisfactory
to Purchaser which report demonstrates that as of the date of such
report (which date shall be no more than 60 days from the date of
delivery thereof to Purchaser) that the Proved Developed Producing
Reserves attributable to the Subject Hydrocarbons are at least 150% of
the sum of (i) the aggregate remaining Scheduled Volumes plus (ii) the
quotient of the then Make-up Volume Balance divided by the Index Price
(assuming an Index Price equal to the Index Price on the date of such
report) as of the date of such report. If such Independent Reserve
Report demonstrates Proved Developed Producing Reserves attributable to
the Subject Hydrocarbons, as of the date of such report, is at least (A)
175% of such sum, then Purchaser shall promptly reimburse Seller for
100% of Seller's reasonable out-of-pocket costs to obtain such
Independent Reserve Report.
(d) All rights which Purchaser shall have been entitled to exercise
under the provisions of Paragraph B of this Section shall terminate upon the
earlier of either (i) when the Production Payment terminates and all amounts
then due and payable to Purchaser for Scheduled Volumes and the Make-Up Volume
Balance (including interest, and all amounts within the Post Default balance),
shall have been duly paid to Purchaser in full, or (ii) when such Event of
Default of Seller shall have been remedied and all such amounts (including
interest, and all amounts within the Post Default balance) shall have been
duly paid in full, without prejudice, however, to the exercise of any such
rights upon any subsequent Default or Event of Default.
Section 16 No Recourse. Notwithstanding anything to the contrary
contained in this Agreement, the Conveyance, or any other Production Payment
Document, recourse by Purchaser, or by its successors and assigns or by any
Person whose interests derive by, through or under Purchaser, against Seller
for any Event of Default or other breach of any Production Payment Document
shall be limited solely and exclusively to the Subject Hydrocarbons.
Consistent with, but not as a limitation on, the foregoing, neither Purchaser
nor any other Person shall have any rights or interests in or against any of
the Subject Interests or any other assets of Seller other than the Subject
Hydrocarbons and the proceeds from the sale thereof following their
production. Also consistent with, but not as a limitation on, the foregoing,
no incorporator, member, beneficiary, contributor, shareholder, director,
officer, or employee of Purchaser, Seller or any Credit Supplier, if any,
shall have any personal liability for the performance or observance of the
covenants, representations and warranties of Purchaser or Seller,
respectively, contained herein, and Seller or Purchaser, respectively, shall
not seek any damages or personal money judgment against any incorporator,
member, beneficiary, contributor, shareholder, director, officer or employee
of Purchaser, Seller or any Credit Supplier, if any, for any default
hereunder; all such personal liability, if any, whether at common law, in
equity, by any constitution, statute, or otherwise, being released and waived
as part of the consideration for the execution and delivery of this
instrument.
Section 17 Notices. Any notice or communication required or permitted
hereunder ("Notice") shall be given in writing, addressed to the following
addresses:
To Seller:
GeoResources, Inc.
1407 West Dakota Parkway
Suite 1-B
Williston, ND 58801
Attention: J. P. Vickers
Telephone: (701) 572-2020
Telecopy: (701) 572-0277
To Purchaser:
Koch Producer Services, Inc.
600 Travis, 53rd Floor
Houston, Texas 77002
Attention: Mark Vivien
Telephone: (713) 229-5464
Telecopy: (713) 229-6161
All Notices shall be given by: (i) personal delivery, (ii) electronic
communication, with a confirmation sent by certified mail return receipt
requested, (iii) U.S. first class mail, postage prepaid, certified mail return
receipt requested, or (iv) a nationally recognized overnight courier service.
All Notices shall be effective and shall be deemed delivered (i) if by
personal delivery or by overnight courier, on the date of delivery if
delivered on or before 4:30 p.m. (Central time) on such day; otherwise, it
shall be deemed to have been delivered on the next business day following
delivery, (ii) if by electronic communication, on the day of receipt unless
received after 4:30 p.m.(Central time), in which event it shall be deemed to
have been received on the next business day following receipt of the
electronic communication, and (iii) if solely by mail, on the third business
day following the date of posting (as evidenced by the postal receipt for the
posting). A party may change its address by Notice to the other party.
Section 18 Expenses. Seller agrees to pay all costs and expenses of
Purchaser (other than payments required to be made by Purchaser on account of
any financing the proceeds of which are used to finance the purchase of the
Production Payment or in connection with any assignment by Purchaser of the
Production Payment, in whole or in part) in connection with, filing, recording
or registration, and any refiling, re-recording or re-registrations, of any
Production Payment Document, or any document executed and delivered pursuant
hereto, but excluding (i) the fees and out-of-pocket expenses of internal and
outside counsel for Purchaser in connection therewith or of Purchaser's
employees, agents or consultants, or (ii) any and all costs of any prior
environmental audits, including, but not limited to prior environmental
reports and, all such reimbursable costs and expenses, to be paid in
immediately available funds at the Closing, if then invoiced, and after the
Closing to be paid promptly upon receipt of an invoice therefore. In
addition, Seller agrees to pay, and to reimburse Purchaser for, all costs,
expenses and taxes hereafter incurred by Purchaser in connection with the
complete discharge of the Production Payment not paid out of Production
Payment Hydrocarbons under the Conveyance, including, without limitation,
expenses reasonably incurred by Purchaser for fees and out-of-pocket expenses
of internal and outside counsel employed by Purchaser in connection therewith.
Section 19 Survival. All of the representations, warranties,
indemnities, covenants and agreements contained herein or in the Conveyance
shall survive the Closing and the conveyance of the Production Payment
pursuant to the Conveyance.
Section 20 Successors and Assigns. This Agreement and the Conveyance
shall inure to the benefit of and be binding upon Seller and its successors
and assigns and Purchaser and its respective successors and assigns; but
subject to the following terms and conditions. Notwithstanding anything in
this Agreement or any other Production Payment Document to the contrary:
(a) Seller may not assign or transfer any of its rights or obligations
hereunder or under the other Production Payment Documents without the prior
written consent of Purchaser, which consent shall not be unreasonably
withheld.
(b) Purchaser may mortgage, pledge, assign or transfer any or all of
its rights or obligations, or both, hereunder or under any of the other
Production Payment Documents without the necessity or requirement of any
consent by Seller, but the rights of such assignees or mortgagees shall be
subject to the provisions of this Agreement, including Section 26 below.
(c) No assignment, mortgage, pledge, or other transfer of any nature
whatsoever, or any financing arrangements, or any interest rate or commodity
swap or hedge agreements, or any other agreement of any nature whatsoever,
entered into by Purchaser with respect to the Production Payment, shall expand
the rights, obligations, or liabilities of either Seller or Purchaser under,
or in any manner alter the terms of, this Agreement, the Conveyance, or any
other Production Payment Document. Consistent with but not as a limitation on
the foregoing, no third party whose interests derive by, through, or under a
party (the "Assigning Party") shall have any rights, remedies, or benefits
against the other party that are greater than the rights, remedies, or
benefits the Assigning Party would have in the absence of the transaction that
gave rise to such third party interest that derives by, through, or under the
Assigning Party.
(d) This Agreement and the other Production Payment Documents are for
the sole benefit of the parties and their successors and assigns and shall be
construed accordingly so as not to confer third party beneficiary rights in
any other party. Consistent with but not as a limitation on the foregoing,
nothing in this Agreement or in any other Production Payment Document, express
or implied, is intended to or shall confer upon any Person other than Seller,
Purchaser and the Indemnified Parties any rights, remedies or other benefits
under or by reason of this Agreement.
Section 21 Interest on Unpaid Amounts. Any amount not paid when due
hereunder or under the Conveyance, including, without limitation, on amounts
included within the Make-Up Volume Balance, shall bear interest on such
overdue amount at a rate of interest per annum equal to the lesser of (i)
Prime Rate plus (A) if no Event of Default shall have occurred and is
continuing two percent (2%) or (B) if an Event of Default shall have occurred
and be continuing, six percent (6.0%), or (ii) the Highest Lawful Rate,
whichever is such lesser rate from time to time (the "Specified Rate"). Such
interest shall be included within the Interest Amount of the Make-Up Balance.
Section 22 Maximum Interest. It is the intention of the parties hereto
to conform strictly to applicable usury laws and, anything herein or in any
other Production Payment Document to the contrary notwithstanding, the
obligations of Seller to Purchaser under this Agreement and the other
Production Payment Documents shall be subject to the limitation that payments
of interest shall not be required to the extent that receipt or charging
thereof would be contrary to provisions of law applicable to Purchaser
limiting rates of interest which may be charged or collected by Purchaser.
Accordingly, if the transactions contemplated hereby would be usurious under
applicable law (including the Federal and state laws of the United States of
America, or of any other jurisdiction whose laws may be mandatorily
applicable) with respect to Purchaser, then, in that event, notwithstanding
anything to the contrary in this Agreement or the other Production Payment
Documents, it is agreed as follows: (a) the provisions of this Section shall
govern and control; (b) the aggregate of all consideration which constitutes
interest under applicable law that is contracted for, charged or received
under this Agreement and the other Production Payment Documents, or under any
of the other aforesaid agreements or otherwise in connection with this
Agreement by Purchaser shall under no circumstances exceed the maximum amount
of interest allowed by applicable law (such maximum lawful interest rate, if
any, with respect to Purchaser herein called the "Highest Lawful Rate"), and
any excess shall be credited to Seller by Purchaser (or, if such consideration
shall have been paid in full, such excess refunded to Seller); (c) all sums
paid, or agreed to be paid, to Purchaser for the use, forbearance and
detention of the amounts owed under this Agreement by Seller to Purchaser
hereunder shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full term of such amounts owed
under this Agreement and the other Production Payment Documents until payment
in full so that the actual rate of interest is uniform throughout the full
term thereof; and (d) if at any time the interest provided pursuant to Section
21 together with any other fees payable pursuant to this Agreement and the
other Production Payment Documents and deemed interest under applicable law,
exceeds that amount which would have accrued at the Highest Lawful Rate, the
amount of interest and any such fees to accrue to Purchaser pursuant to this
Agreement and the other Production Payment Documents shall be limited,
notwithstanding anything to the contrary in this Agreement or in any other
Production Payment Document to that amount which would have accrued at the
Highest Lawful Rate, but any subsequent reductions, as applicable, shall not
reduce the interest to accrue to Purchaser pursuant to this Agreement and
other Production Payment Documents below the Highest Lawful Rate until the
total amount of interest accrued pursuant to this Agreement and the other
Production Payment Documents and such fees deemed to be interest equals the
amount of interest which would have accrued to Purchaser if a varying rate per
annum equal to the interest provided pursuant to Section 21 had at all times
been in effect, plus the amount of fees which would have been received but for
the effect of this Section.
Section 23 Miscellaneous Provisions. No delay by Purchaser in the
exercise of any right or remedy under this Agreement or any other Production
Payment Document shall operate as a waiver thereof, and no single or partial
exercise by Purchaser of any right or remedy under this Agreement or any other
Production Payment Document shall preclude other or further exercise thereof
or the exercise of any other right or remedy hereunder or thereunder; nor
shall any modification to or waiver of any of the provisions of this Agreement
or any other Production Payment Document be binding upon either Seller or
Purchaser except as expressly set forth in a writing duly signed and delivered
on behalf of the Person to be bound. No action by Purchaser or Seller
permitted hereunder shall in any way affect or impair the rights and
obligations of the other party under this Agreement except as set forth herein
or in the Conveyance. Seller acknowledges that Purchaser may from time to
time enter into interest rate or commodity swap or hedge agreements with
respect to the Production Payment.
Section 24 Section Captions. Section captions used in this Agreement
are for convenience of reference only and shall not affect the construction of
this Agreement.
Section 25 Indemnity. In consideration of the purchase by Purchaser of
the Production Payment, Seller hereby indemnifies, exonerates and holds each
Indemnified Party free and harmless from and against any and all claims,
demands, suits, actions, causes of action, losses, costs, judgments,
liabilities (including, without limitation, fines, penalties and interest) and
damages, and expenses of every kind and nature incurred in connection
therewith (irrespective of whether any such Indemnified Party is a party to
the action for which indemnification hereunder is sought), including
reasonable attorneys' fees and disbursements incurred by any Indemnified Party
in enforcing the indemnified obligations hereunder, together with interest on
such amounts at the Specified Rate until paid in full (collectively, the
"Indemnified Liabilities"), made against or incurred by, the Indemnified
Parties or any of them as a result of, or arising out of, or relating to (a)
the Production Payment, (b) any loss or claim with respect to any royalties or
burdens on production, (c) the Conveyance, this Agreement or the other
Production Payment Documents and the ownership or purported ownership of the
Production Payment, (d) any investigation, litigation or proceeding related to
the Subject Interests and including any environmental cleanup, audit,
compliance or other matter relating to any Environmental Law or the protection
of the environment or the Release by Seller or any of his officers, directors,
employees or agents (but not by Purchaser, the Oil Buyer, or any of their
officers, directors, employees or agents) of any Hazardous Material; (e) the
presence on or under, or the Release from, any of the Subject Interests any
Hazardous Material (including any losses, liabilities, damages, injuries,
costs, expenses or claims asserted or arising under any Environmental Law),
regardless of whether caused by, or within the control of, Seller (but not if
caused by Purchaser, the Crude Buyer or any of their officers, directors,
employees or agents), (f) any material breach of any representation or
warranty by Seller contained in this Purchase Agreement or any other
Production Payment Document, including, without limitation, any representation
or warranty with respect to title to any of the Subject Interests, (h) the
failure of Seller to perform any of its material agreements or obligations set
forth in this Agreement or in the other Production Payment Documents or the
failure of any Oil delivered to satisfy the quality or the quantity
specifications for such oil, and whether through an act or omission of an
Indemnified Party or otherwise, and whether or not arising out of the sole,
joint or concurrent negligence, fault or strict liability of any Indemnified
Party, except for any such Indemnified Liabilities arising for the account of
a particular Indemnified Party by reason of the relevant Indemnified Party's
gross negligence or willful misconduct and except in the case of Indemnified
Liabilities of the type described in the foregoing clause (d) or (e) to the
extent caused by the Purchaser or any of its officers, directors, employees or
agents, PROVIDED, THAT IT IS THE INTENTION OF THE PARTIES HERETO THAT THE
INDEMNIFIED PARTIES BE INDEMNIFIED IN THE CASE OF THEIR OWN ORDINARY
NEGLIGENCE BUT NOT IN THE CASE OF THEIR GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT. This indemnity shall apply, without limitation, to any
Indemnified Liability imposed upon any Indemnified Party as a result of any
statute, rule, regulation or theory of strict liability. The Indemnified
Parties, and their respective successors and assigns, shall have the right to
defend against any such claims, employing attorneys therefore and, unless
furnished with reasonable indemnity, they or any of them shall have the right
to pay or compromise and adjust all such claims. If and to the extent that
the foregoing undertaking may be unenforceable for any reason, Seller hereby
agrees to make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities which is permissible under applicable law.
Section 26 Servicer. If Purchaser should mortgage or assign any
interests hereunder or under the Conveyance to more than one Person, such
Persons must from time to time designate in writing one Person to act as
Servicer (the "Servicer") to act as the exclusive authorized representative on
behalf of Purchaser to receive notices on behalf of Purchaser hereunder or
under the Conveyance, to arrange deliveries of Production Payment Hydrocarbons
to Purchaser or to take such other actions or perform such elections and
obligations of Purchaser under this Agreement and the Conveyance. Seller
shall be entitled to deal only with the Servicer regarding such matters until
notified by Purchaser of a change in the Servicer. Seller shall not be
obligated to acknowledge or honor any assignment or mortgage of Purchaser's
rights and interests until it has been notified in writing of such assignment,
then shall Seller be required to deal with anyone other than the Servicer
regarding such interests. This provision shall not affect the validity of any
assignment or mortgage of which Seller is not notified, but controls the
parties entitled to deal with Seller regarding such rights and interests.
Section 27 Right of First Refusal. Purchaser shall have, and Seller
hereby grants to Purchaser, a right of first refusal to match any proposed
capitalization (including any loan or equity contribution) of Seller with
respect to any well or other development in connection with the Subject
Interests, negotiated by Seller at any time prior to November 30, 1999 by a
bona-fide third party; provided that Purchaser shall give notice of its intent
to exercise its right of first refusal within 30 Business Days of Purchaser's
receipt of a true and correct copy of such third party's commitment, term
sheet or letter of understanding with Seller. Seller covenants and
acknowledges that the granting of this right of first refusal was a material
condition and consideration for Purchaser entering into this Purchase
Agreement and that Purchaser would not have entered into this Purchase
Agreement except for the granting of this right of first refusal.
Section 28 Choice of Law. THIS AGREEMENT SHALL BE DEEMED TO BE A
CONTRACT MADE UNDER THE LAWS OF THE STATE OF KANSAS AND FOR ALL PURPOSES SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THAT STATE IN ALL
RESPECTS, INCLUDING, WITHOUT LIMITATION, MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE.
Section 29 Forum Selection and Consent to Jurisdiction. ANY LITIGATION
BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT
OR ANY OTHER PRODUCTION PAYMENT DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF SELLER OR
PURCHASER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE
STATE OF KANSAS OR IN THE UNITED STATES DISTRICT COURT FOR THE STATE OF
KANSAS; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY
SUBJECT INTEREST OR OTHER PROPERTY MAY BE BROUGHT IN THE COURTS OF ANY
JURISDICTION WHERE SUCH SUBJECT INTEREST OR OTHER PROPERTY MAY BE FOUND.
SELLER AND PURCHASER HEREBY EXPRESSLY AND IRREVOCABLY SUBMIT TO THE
JURISDICTION OF THE COURTS OF THE STATE OF KANSAS AND OF THE UNITED STATES
DISTRICT COURT FOR THE STATE OF KANSAS FOR THE PURPOSE OF ANY SUCH LITIGATION
AS SET FORTH ABOVE AND IRREVOCABLY AGREE TO BE BOUND BY ANY JUDGMENT RENDERED
THEREBY IN CONNECTION WITH SUCH LITIGATION. SELLER AND PURCHASER EACH FURTHER
IRREVOCABLY CONSENT TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE
PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF KANSAS. SELLER
AND PURCHASER EACH HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH SELLER OR PURCHASER MAY HAVE OR
HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN
ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT SELLER OR PURCHASER
HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF
FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO
JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO
THEMSELVES OR THEIR INTERESTS, SELLER AND PURCHASER EACH HEREBY IRREVOCABLY
WAIVE SUCH IMMUNITY IN RESPECT OF THEIR OBLIGATIONS UNDER THIS AGREEMENT AND
THE OTHER PRODUCTION PAYMENT DOCUMENTS, BY ACCEPTING ANY ASSIGNMENT OF
INTERESTS SUBJECT HERETO, THE ASSIGNEE SHALL ACCEPT THIS PROVISION.
Section 30 Waiver of Jury Trial. SELLER AND PURCHASER EACH HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER
OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER PRODUCTION PAYMENT
DOCUMENTS, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
ORAL OR WRITTEN) OR ACTIONS OF THE PARTIES IN CONNECTION THEREWITH. SELLER
AND PURCHASER EACH ACKNOWLEDGE AND AGREE THAT THEY HAVE RECEIVED FULL AND
SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF THIS
AGREEMENT AND THE OTHER PRODUCTION PAYMENT DOCUMENTS) AND THAT THIS PROVISION
IS A MATERIAL INDUCEMENT FOR THE OTHER PARTY HERETO ENTERING INTO THIS
AGREEMENT AND THE OTHER PRODUCTION PAYMENT DOCUMENTS, BY ACCEPTING ANY
ASSIGNMENT OF INTERESTS SUBJECT HERETO, THE ASSIGNEE SHALL ACCEPT THIS
SECTION.
Section 31 No Oral Agreements. THIS AGREEMENT (INCLUDING THE ANNEXES
AND SCHEDULES ATTACHED HERETO) AND THE OTHER PRODUCTION PAYMENT DOCUMENTS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date hereinabove first written.
SELLER:
GEORESOURCES, INC.
By: /s/ J. P. Vickers
Name: J. P. Vickers
Title: President
PURCHASER:
KOCH PRODUCER SERVICES, INC.
By: /s/ Bradley D. Burnside
Name: Bradley D. Burnside
Title: Vice President
ANNEX I
TO
PURCHASE AGREEMENT FOR VOLUMETRIC PRODUCTION PAYMENT
[Form of Conveyance of Volumetric Production Payment to be attached]
CONVEYANCE OF VOLUMETRIC PRODUCTION PAYMENT
from
GEORESOURCES, INC.,
to
KOCH PRODUCER SERVICES, INC.
Dated effective as of December 3, 1997
TABLE OF CONTENTS
Page
Section 1. Conveyance 1
Section 2.1 Monthly Deliveries 2
Section 2.2 Make-Up Volume Balance 3
Section 3. Application of Production Payment Hydrocarbons 3
Section 4. Term of the Production Payment 3
Section 5. Certain Conditions Applicable to the Production Payment 4
Section 6. Abandonment of Wells or Surrender or Mortgage or
Transfer of Subject Interests 4
Section 7. Pooling and Unitization 4
Section 8. Definitions 4
Section 9. Successors and Assigns 4
Section 10. Representations and Warranties 5
Section 11. Unenforceable or Inapplicable Provisions 5
Section 12 Section Captions 6
Section 13. Execution in Counterparts 6
EXHIBITS, SCHEDULES AND ANNEXES
EXHIBIT A - Description of the Leases
EXHIBIT B - Definitions
SCHEDULE I - Scheduled Volumes
CONVEYANCE OF VOLUMETRIC PRODUCTION PAYMENT
THIS CONVEYANCE OF VOLUMETRIC PRODUCTION PAYMENT is dated effective as
of December 3, 1997 (the "Effective Date") (such agreement, as from time to
time hereafter may be modified, supplemented or amended, this "Conveyance"),
and is a CONVEYANCE OF VOLUMETRIC PRODUCTION PAYMENT from GEORESOURCES, INC.,
a Colorado corporation (herein called "Working Interest Owner"), to KOCH
PRODUCER SERVICES, INC., a Delaware corporation (herein called "Production
Payment Owner").
RECITALS
Working Interest Owner is presently the owner of interests in the Oil
and gas leases and other interests described in Exhibit A attached hereto and
intends to hereby convey to Production Payment Owner a production payment
payable from the oil produced therefrom.
CONVEYANCE OF PRODUCTION PAYMENT
Section 1. Conveyance. Working Interest Owner, for valuable
consideration to Working Interest Owner in hand paid by Production Payment
Owner, the receipt and sufficiency of which are hereby acknowledged, hereby
grants, sells, conveys, assigns, delivers and sets over unto Production
Payment Owner, effective as of 7:00 a.m. on the Effective Date, as a real
property interest and as a PRODUCTION PAYMENT, such portion of all the Subject
Hydrocarbons that shall entitle Production Payment Owner to receive in kind,
free and clear of (and without deduction therefrom of) any and all royalties
and other burdens on production, including, without limitation, all Operating
Expenses, at the Delivery Points, during each Month severed Production Payment
Hydrocarbons in a quantity equal to (A) the Scheduled Volumes for such Month,
plus (B) Make-Up Volumes to be delivered during such Month such that the Make-
Up Volume Balance shall be reduced to zero (but not to exceed in any Month the
Maximum Make-Up Volume). The interests hereby conveyed, including, but not
limited to, the real property interest described above, together with the
Hydrocarbons accruing thereto and the rights, titles, interests, remedies,
powers and privileges appurtenant or incident thereto, as hereinafter
provided, are hereinafter called the "Production Payment".
The Scheduled Volumes shall be those quantities of oil to be delivered
during each Month, as set forth on Schedule I attached hereto, which shall
total, in the aggregate, 27,375 barrels of oil. The Make-Up Volumes shall be
those additional volumes of oil to be delivered during each Month (but not to
exceed in any Month the Maximum Make-Up Volume), above the Scheduled Volumes
for such Month, in order to reduce the Make-Up Volume Balance outstanding
during such Month to zero.
This Production Payment shall continue for a term extending from the
Effective Date until November 30, 1998, and so long thereafter until the Make-
Up Volume Balance shall be zero, as set forth in Section 4. The Production
Payment shall be, and all Production Payment Hydrocarbons shall be delivered,
free and clear of (and without deduction of) any and all royalties and other
burdens on production, including, without limitation, all Production Expenses.
TO HAVE AND TO HOLD the Production Payment unto Production Payment
Owner, and Production Payment Owner's successors and assigns for the term
hereof.
This Production Payment shall extend to, burden and encumber each
Subject Interest, together with all extensions and renewals of each Subject
Interest, and any replacements of such interests acquired by Working Interest
Owner in lands now covered by a Subject Interest during the term hereof. In
the event any individual Subject Interest (or portion thereof, as applicable)
should cease to be in force and effect, or otherwise expire before the time
this Conveyance and the Production Payment shall terminate, and such
individual Subject Interest (or portion thereof, as applicable) not be
extended, renewed or replaced, the Production Payment no longer shall apply to
that particular Subject Interest (or portion thereof, as applicable), but the
Production Payment shall remain in full force and effect and undiminished as
to all remaining Subject Interests (and the remainder portion of such Subject
Interest, as applicable), and neither the Scheduled Volume nor the Make-Up
Volumes shall ever be reduced or diminished by reason of the expiration of a
Subject Interest (or any portion thereof, as applicable).
Section 2.1 Monthly Deliveries. Each Month, Working Interest Owner
shall deliver, and Production Payment Owner shall accept and receive, at the
Delivery Points the Production Payment Hydrocarbons, being those volumes of
oil constituting (A) the Scheduled Volumes for such Month (as set forth on
Schedule 1 attached hereto) and (B) the Make-Up Volumes (if any) owed during
such Month, provided, however, that during any Month Working Interest Owner
shall not be required to deliver either (i) volumes of Production Payment
Hydrocarbons in excess of the total volume of Subject Hydrocarbons produced
during such month, less those volumes necessary to pay state severance taxes,
royalties and overriding royalties for such Month or (ii) Make-Up Volumes in
an amount that would cause the total Production Payment Hydrocarbons delivered
during any month to exceed seventy-five percent (75%) of the total volume of
Subject Hydrocarbons produced during any Month but provided further, that
Production Payment Owner may require Working Interest Owner to deliver
Production Payment Hydrocarbons in an amount up to 100% of the total volume of
Subject Hydrocarbons produced during any Month less those volumes necessary to
pay state severance taxes, royalties and overriding royalties for such Month
if such deliveries are needed to pay Production Payment Owner any Post-Default
Amount which is included within the Make-Up Volumes to be delivered during
such Month. During any month, Production Payment Owner shall not be required
to accept and receive, and Working Interest Owner shall not be required to
deliver any volumes in excess of the volume of Production Payment Hydrocarbons
owed during such Month, provided, however, that for any Month, Production
Payment Owner and Working Interest Owner may mutually agree to increase the
volumes of Production Payment Hydrocarbons to be delivered and received during
such Month, and such increased volumes shall be applied as set forth in the
Purchase Agreement.
Section 2.2 Make-Up Volume Balance. The Make-Up Volume Balance shall be
the amount of additional Production Payment Hydrocarbons, if any, owed by
Working Interest Owner by reason of certain obligations, the performance of
which may be enforced through this Production Payment interest, as defined in
Annex VII of the Purchase Agreement.
Section 3. Application of Production Payment Hydrocarbons. During each
Month, production from wells operated under the Subject Interests shall be
applied first towards satisfying obligations for any royalty interests,
overriding royalty interests and state severance taxes existing on the
Effective Date. The next production during such Month attributable to the
Subject Interests shall be applied as Production Payment Hydrocarbons, and any
remaining production during such Month shall be credited to Working Interest
Owner. The Production Payment Hydrocarbons actually received by Production
Payment Owner during any Month shall be deemed to have been received and
applied as of the last day of such Month, as follows:
First, to reduction of the unliquidated balance of the Make-Up Volume
Balance referred to in Section 2.2.
Second, to the Scheduled Volumes, for such Month; and
Third, as provided in the Purchase Agreement, if the parties mutually
agree to the delivery and receipt of additional volumes of Production Payment
Hydrocarbons.
No application of Subject Hydrocarbons to the Production Payment shall
be deemed to have been made except from severed Production Payment
Hydrocarbons actually received in kind by or on behalf of Production Payment
Owner.
Section 4. Term of the Production Payment. Upon the receipt by the
Production Payment Owner of the sum of the Scheduled Volumes plus such
additional volumes of Production Payment Hydrocarbons or other payments such
that the Make-Up Volume Balance shall be reduced to zero, the Production
Payment shall be fully discharged. Upon discharge of the Production Payment
as above provided, all rights, titles, interests, powers, remedies and
privileges herein conveyed shall terminate and revert to Working Interest
Owner, its successors and assigns, and, upon request by Working Interest
Owner, Production Payment Owner shall execute and deliver at the cost and
expense of Working Interest Owner such instrument or instruments as may be
reasonably necessary to evidence the discharge and termination of the
Production Payment.
Section 5. Certain Conditions Applicable to the Production Payment.
The Production Payment shall be subject to the following provisions:
The Production Payment conveyed pursuant hereto is a non-expense-bearing
interest in the Subject Interests, free of all cost, risk and expense of
production, operation and delivery (to the Delivery Points or Alternate
Delivery Points) and is a non-operating interest. Production Payment Owner and
its successors and assigns shall not be liable or responsible in any way for
payment of any costs, expenses or liabilities in respect of the Subject
Interests or any portion thereof or incurred in connection with the production
or delivery of Production Payment Hydrocarbons or in developing, exploring,
drilling, equipping, testing, operating, producing, maintaining or abandoning
the Subject Interests or any well or facility thereon or in storing, handling,
treating or transporting to any Delivery Point or Alternate Delivery Point
production therefrom and is released from all such costs, expenses and
liabilities as a part of the consideration for the purchase by the Production
Payment Owner of the Production Payment. If Production Payment Owner shall
pay any such costs, expenses or liabilities notwithstanding the foregoing, the
Production Payment Owner shall have no obligation or liability for any other
such costs, expenses or liabilities, and the Working Interest Owner hereby
indemnifies Production Payment Owner and each other Indemnified Party from and
against all such costs, expenses and liabilities.
Section 6. Abandonment of Wells or Surrender or Mortgage or Transfer of
Subject Interests. So long as the Production Payment remains in force,
Working Interest Owner shall not, without first obtaining the written consent
of Production Payment Owner, as provided in the Purchase Agreement, abandon,
voluntarily surrender or release any well on the Subject Interests or any part
thereof on the date hereof which is producing or capable of producing in
paying quantities.
Section 7. Pooling and Unitization. Working Interest Owner may not
enter into pooling or unitization agreements affecting the Subject Interests
or any part thereof without the prior written consent of Production Payment
Owner.
Section 8. Definitions. In addition to the defined terms set forth on
Exhibit B hereto, for all purposes of this Conveyance, terms defined in Annex
VII to the Purchase Agreement for Volumetric Production Payment between the
Working Interest Owner and the Production Payment Owner dated as of December
3, 1997, (the "Purchase Agreement") shall be used herein with the same
meaning. This Conveyance shall be subject to the relevant provisions of the
Purchase Agreement.
Section 9. Successors and Assigns. All the covenants and agreements of
Working Interest Owner herein or in the Purchase Agreement shall be covenants
running with the land and the Subject Interests and shall be binding upon
Working Interest Owner and its heirs, beneficiaries, legal representatives,
successors and assigns and shall inure to the benefit of Production Payment
Owner and its heirs, beneficiaries, legal representatives, successors and
assigns; provided, however, that (i) this provision shall not be deemed to
permit any assignment or other transfer of the interest of Working Interest
Owner in any of the Subject Interests that is not permitted by the provisions
of this instrument or the Purchase Agreement and (ii) any assignee or
transferee of any of Working Interest Owner's rights hereunder or thereunder
shall be subject to the terms of the Purchase Agreement and this Conveyance.
All the covenants and agreements of Production Payment Owner herein or in the
Purchase Agreement shall be binding upon Production Payment Owner and its
heirs, beneficiaries, legal representatives, successors and assigns and shall
inure to the benefit of Working Interest Owner and its heirs, beneficiaries,
legal representatives, successors and assigns, and any assignee or transferee
of any of Production Payment Owner's rights hereunder or thereunder shall be
subject to the terms of the Purchase Agreement and this Conveyance.
Consistent with, but not as a limitation on, the foregoing, subject to the
terms, conditions, and requirements of the Purchase Agreement, including,
without limitation, those set forth in Sections 16 and 20 of the Purchase
Agreement, Production Payment Owner, or Production Payment Owner's successors
and assigns, shall have the right and power to sell, convey, assign or
mortgage the Production Payment in whole or in part. If Production Payment
Owner, or Production Payment Owner's successors and assigns, at any time shall
execute a mortgage or deed of trust covering all or any part of the Production
Payment as security for any obligation, the mortgagee, the pledgee or the
trustee therein named or the holder of the obligation secured thereby shall be
entitled, to the extent such mortgage or deed of trust so provides, to
exercise all of the rights, remedies, powers and privileges herein conferred
upon Production Payment Owner, and to give or withhold all consents herein
required or permitted to be obtained from Production Payment Owner, provided
however that, notwithstanding the foregoing, in the event of a mortgage or
partial assignment of the Production Payment, Production Payment Owner and all
assignees and mortgagees shall designate in writing from time to time to
Working Interest Owner, one party who shall be authorized to act as the
exclusive representative of all owners and mortgagees of this Production
Payment concerning dealings with Working Interest Owner in matters involving
this Conveyance or the Purchase Agreement.
Section 10. Representations and Warranties. Working Interest Owner
warrants title to the Production Payment. This Conveyance is made with full
substitution and subrogation of Production Payment Owner, its successors and
assigns, in and to all covenants and warranties by others heretofore given or
made in respect of any of the Subject Interests or any part thereof.
Section 11. Unenforceable or Inapplicable Provisions. If any provision
hereof is invalid or unenforceable in any jurisdiction, the other provisions
hereof shall remain in full force and effect in such jurisdiction, and the
remaining provisions hereof shall be construed to effectuate the provisions
hereof, and the invalidity of any provision hereof in any jurisdiction shall
not affect the validity or enforceability of any such provision in any other
jurisdiction.
Section 12. Section Captions. Section captions used in this Conveyance
are for convenience of reference only and shall not affect the construction of
this Conveyance.
Section 13. Execution in Counterparts. This Conveyance may be executed
in several counterparts each of which shall be deemed to be an original and
all of which are identical. All of such counterparts together shall
constitute but one and the same Conveyance. All of said documents are
integral parts of one consolidated transaction and are to be construed as a
single transaction.
IN WITNESS WHEREOF, this Conveyance has been executed, or caused to be
executed on his behalf, by Working Interest Owner as of the day and year first
above written, but effective as of the Effective Date.
WORKING INTEREST OWNER:
GEORESOURCES, INC.
By: /s/ J. P. Vickers
Name: J.P. Vickers
Title: President
The name and address of Working Interest
Owners is:
GeoResources, Inc.
1407 West Dakota Parkway, Suite 1-B
Williston, ND 58801
The name and address of Production Payment
Owner are:
KOCH PRODUCER SERVICES, INC.
600 Travis, 53rd Floor
Houston, Texas 77002
Attention: Mark Vivien
ACKNOWLEDGMENTS
STATE OF North Dakota )
) SS.
COUNTY OF Williams )
BE IT REMEMBERED that I, Cathy Callahan, a Notary Public duly
qualified, commissioned, sworn and acting in and for the County and State
aforesaid, hereby certify that, on this 3rd day of December, 1997, there
appeared before me J. P. Vickers , the President of
GeoResources, Inc., a Colorado corporation, whose address is 1407 West Dakota
Parkway, Suite 1-B, Williston, ND 58801.
TEXAS This instrument was acknowledged before me on this day by
each such person as the designated officer of the
corporation set opposite his name (or a Trustee, as the case
may be) on behalf of said corporation set opposite his name
(or of himself as Trustee, as the case may be).
NORTH DAKOTA Before me personally appeared each such person, each of whom
is known to me to be the officer of the corporation or
association described in and that executed this instrument,
and acknowledged to me that such corporation or association
executed the same.
Witness my hand and official seal.
/s/ Cathy L. Callahan
Notary Public
Residing at Williston, ND
My commission expires:
June 22,1999
EXHIBIT A
to
Conveyance of Volumetric Production Payment
This Exhibit A sets forth the description of the "Leases" and other
interests which are defined as "Subject Interests" in the Conveyance of
Volumetric Production Payment to which this Exhibit A is attached, subject to
the limitations contained herein.
Property Descriptions:
Leases. Each field contains descriptions of the oil, gas and mineral
leases, oil and gas leases and other interests which are the "Leases" covered
hereby covering lands located within the State of North Dakota in each case
such properties lying within the State identified. The following descriptive
information may also be included for a particular Lease.
County. A designation of the county in which the respective Subject
Interests lie.
Description of Property. This sets forth a description of some or all
of the properties covered by the Oil and gas leases designated.
The Subject Interests are not limited nor shall they be confined to any
unit, unitized interval, aerial extent of a unit, well bore or other similar
limitation, notwithstanding the inclusion of well names, unit names, land
descriptions or other matters, all of which are included for identification
only. Rather, all of the interests of Working Interest Owner in the various
Leases listed on the following pages shall be included within the meaning of
the term Subject Interests.
Leasehold and Net Revenue Interests. Immediately following the listing
of Leases for each field is a listing of Properties, well names associated
therewith and, as indicated, "Leasehold and Net Revenue Interests" for each
such well. With respect to each of the said wells, the leasehold interest is
the share of costs borne with respect thereto and the net revenue interests
shall mean, with respect to the relevant well or the relevant unit on which
the well is located, that interest in the Oil and Gas production which is
produced, saved and sold from such well or unit after deducting all burdens
against the production therefrom (other than the burden or burdens created by
this instrument and other instruments of even date herewith among the same
parties as those who have executed this instrument).
Matters Contested in Good Faith. Following the description of Permitted
Liens in this Exhibit A is a listing of all liens and encumbrances pertaining
to the Subject Interests which the Working Interest Owner is contesting in
good faith.
EXHIBIT "A"
STATE OF NORTH DAKOTA COUNTY OF BOTTINEAU
Lease Schedule
LESSOR State Land Department, State of North Dakota
LESSEE Leonard F. Ward and Almer Swanson
DATE 5/29/49
DESCRIPTION Township 162 North, Range 82 West
Section 25: NE1/4 and other lands not
subject to this agreement
ACRES 160
BOOK Z
PAGE 475
LESSOR William M. Steinhaus (aka W. M. Steinhaus)
and Louise Steinhaus, husband and wife
LESSEE Placid Oil Company
DATE 8/23/73
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2,
and other lands not subject
to this agreement
ACRES 157.31
BOOK 176
PAGE 219
LESSOR Evelyn L. Lorius (fka Evelyn L. Nielsen)
and Fred A. Lorius, wife and husband
LESSEE GeoResources, Inc.
DATE 3/14/75
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2,
and other lands not subject
to this agreement
ACRES 157.31
BOOK 186
PAGE 21
LESSOR R. O. Gothenquist and
Ruth M. Gothenquist, husband and wife
LESSEE GeoResources, Inc.
DATE 3/14/75
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2,
and other lands not subject
to this agreement
ACRES 157.31
BOOK 186
PAGE 41
LESSOR Howard Spoklie
LESSEE GeoResources, Inc.
DATE 3/14/75
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2,
and other lands not subject
to this agreement
ACRES 157.31
BOOK 186
PAGE 294
LESSOR Walter Satrom and
Ruby L. Satrom, husband and wife
LESSEE GeoResources, Inc.
DATE 3/14/75
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2,
and other lands not subject
to this agreement
ACRES 157.31
BOOK 186
PAGE 296
LESSOR Melvin Ballantyne and
Russell Ballantyne
LESSEE GeoResources, Inc.
DATE 9/23/77
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2
ACRES 157.31
BOOK 207
PAGE 404
LESSOR Phillips Petroleum Company
LESSEE GeoResources, Inc.
DATE 4/20/77
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2
ACRES 157.31
BOOK 212
PAGE 25
LESSOR Great American Royalties, Inc.
LESSEE GeoResources, Inc.
DATE 9/23/77
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2
ACRES 157.31
BOOK 254
PAGE 546
Well Schedule (Wells in the pooled area described as the NE1/4 Sec. 25, T162N
R82W and the NW1/4 Sec. 30, T162N R81W containing 317.31 acres)
Well Name Working Interest Net Revenue
Percentage Interest Percentage
Ballantyne-State #1 100.0 81.40854
Ballantyne-State #3 100.0 81.40854
William Steinhaus #1 SWD 100.0 N/A
William Steinhaus #2 100.0 81.40854
Ballantyne-State/Steinhaus #H1 100.0 81.40854
EXHIBIT B
to
Conveyance of Volumetric Production Payment
This Exhibit B sets forth the definition of certain terms used in the
Conveyance.
Defined Terms:
Capitalized terms used in this Preamble and not otherwise defined herein
shall the means ascribed to them in Annex VII to the Purchase Agreement.
Certain specific terms are defined as set forth below:
"Hydrocarbons" shall mean collectively, crude oil, condensate and
other liquid hydrocarbons, but not natural gas or liquid products
extracted from gas by means other than conventional field separation.
"Lease Use Hydrocarbons" means any Hydrocarbons which are
unavoidably lost in the production thereof or used by Working Interest
Owner or the operator of the Subject Interests in conformity with good
field practices in drilling or producing operations (including gas
injection, secondary recovery, pressure maintenance, repressuring or
cycling operations) conducted for the purpose of producing Hydrocarbons
from the Subject Interests, but only for so long as and to the extent
such Hydrocarbons are so used.
"Production Payment Hydrocarbons" shall mean the Hydrocarbons
conveyed to Production Payment Owner pursuant to this Conveyance and
shall include Scheduled Volumes and Make-Up Volumes as the same may be
adjusted from time to time as set forth in Sections 1 and 2 hereof and
in the Purchase Agreement, which shall accrue or be attributable to the
Production Payment; provided, however, that Production Payment
Hydrocarbons shall not include (I) Non-Consent Hydrocarbons where the
Working Interest Owner is the non-consenting party or (ii) Lease Use
Hydrocarbons.
"Subject Hydrocarbons" shall mean all Hydrocarbons in and under,
and which may be produced and saved from, and which shall accrue or be
attributable to the Subject Interests and which are produced after the
Effective Date (other than Lease Use Hydrocarbons and Non-Consent
Hydrocarbons where Working Interest Owner is the non-consenting party).
"Subject Interests" shall mean Working Interest Owner's right,
title and interest in the Oil and gas leases and the leasehold working
interests, described in Exhibit A, together with all Hydrocarbons
severed during the term of this Production Payment which are
attributable to such leases and interests; together with Working
Interest Owner's right, title and interest, if any, in, to and under, or
derived from, all of the valid Subject Hydrocarbons unitization and
pooling agreements which are described in such Exhibit A or which relate
to any of the properties and interests described in such Exhibit A. The
term "Subject Interest," when used with reference to any particular
Subject Interest, shall mean and include Working Interest Owner's right,
title and interest in (i) such Subject Interest as the same may be
enlarged or diminished by the provisions of any contract or other
instrument described in Exhibit A, or by the removal of any charges or
encumbrances to which such Subject Interest is subject, (ii) any and all
renewals, replacements and extensions of such Subject Interest, or other
interests in the Hydrocarbons in, under and that may be produced from
lands comprising a portion of the Subject Interests acquired by Working
Interest Owner during the term hereof, (iii) all contracts supplemental
to or amendatory of or in substitution for the contracts described above
insofar as the same relate to such Subject Interest, and (iv) all
rights, titles and interests accruing or attributable to such Subject
Interest by virtue of its being included in any unit.
SCHEDULE I
to
Conveyance of Volumetric Production Payment
Month Scheduled Oil Volumes (bbls) Delivery Point
Dec-97 2,325 Delivery point is at the
Jan-98 2,325 Central tank battery for the
Feb-98 2,100 following wells unless
Mar-98 2,325 mutually agreed to by Koch Oil
Apr-98 2,250 Company and GeoResources, Inc.
May-98 2,325
Jun-98 2,250 Well Names
Jul-98 2,325
Aug-98 2,325 Ballantyne-State #1
Sep-98 2,250 Ballantyne-State #3
Oct-98 2,325 William Steinhaus #2
Nov-98 2,250 Ballantyne-State/Steinhaus #H1
Totals 27,375
ANNEX II
TO
PURCHASE AGREEMENT FOR VOLUMETRIC PRODUCTION PAYMENT
List of Subject Interests For Title Opinions
STATE OF NORTH DAKOTA COUNTY OF BOTTINEAU
Lease Schedule
LESSOR State Land Department, State of North Dakota
LESSEE Leonard F. Ward and Almer Swanson
DATE 5/29/49
DESCRIPTION Township 162 North, Range 82 West
Section 25: NE1/4 and other lands not
subject to this agreement
ACRES 160
BOOK Z
PAGE 475
LESSOR William M. Steinhaus (aka W. M. Steinhaus)
and Louise Steinhaus, husband and wife
LESSEE Placid Oil Company
DATE 8/23/73
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2,
and other lands not subject
to this agreement
ACRES 157.31
BOOK 176
PAGE 219
LESSOR Evelyn L. Lorius (fka Evelyn L. Nielsen)
and Fred A. Lorius, wife and husband
LESSEE GeoResources, Inc.
DATE 3/14/75
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2,
and other lands not subject
to this agreement
ACRES 157.31
BOOK 186
PAGE 21
LESSOR R. O. Gothenquist and
Ruth M. Gothenquist, husband and wife
LESSEE GeoResources, Inc.
DATE 3/14/75
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2,
and other lands not subject
to this agreement
ACRES 157.31
BOOK 186
PAGE 41
LESSOR Howard Spoklie
LESSEE GeoResources, Inc.
DATE 3/14/75
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2,
and other lands not subject
to this agreement
ACRES 157.31
BOOK 186
PAGE 294
LESSOR Walter Satrom and
Ruby L. Satrom, husband and wife
LESSEE GeoResources, Inc.
DATE 3/14/75
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2,
and other lands not subject
to this agreement
ACRES 157.31
BOOK 186
PAGE 296
LESSOR Melvin Ballantyne and
Russell Ballantyne
LESSEE GeoResources, Inc.
DATE 9/23/77
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2
ACRES 157.31
BOOK 207
PAGE 404
LESSOR Phillips Petroleum Company
LESSEE GeoResources, Inc.
DATE 4/20/77
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2
ACRES 157.31
BOOK 212
PAGE 25
LESSOR Great American Royalties, Inc.
LESSEE GeoResources, Inc.
DATE 9/23/77
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2
ACRES 157.31
BOOK 254
PAGE 546
Well Schedule (Wells in the pooled area described as the NE1/4 Sec. 25, T162N
R82W and the NW1/4 Sec. 30, T162N R81W containing 317.31 acres)
Well Name Working Interest Net Revenue
Percentage Interest Percentage
Ballantyne-State #1 100.0 81.40854
Ballantyne-State #3 100.0 81.40854
William Steinhaus #1 SWD 100.0 N/A
William Steinhaus #2 100.0 81.40854
Ballantyne-State/Steinhaus #H1 100.0 81.40854
ANNEX III
TO
PURCHASE AGREEMENT FOR VOLUMETRIC PRODUCTION PAYMENT
Form of
Monthly Hydrocarbons Report
In connection with that certain Purchase Agreement For Volumetric
Production Payment, dated December 3, 1997, among GEORESOURCES, INC., a
Colorado corporation (the "Seller"), and KOCH PRODUCER SERVICES, INC. (the
"Purchaser"), Seller does hereby certify that to the Seller's knowledge,
information and belief pursuant to Section 5(f)(vii) of the Agreement, as
follows (capitalized terms hereinafter used having the meaning specified in
the Agreement):
1. Seller is in compliance in all material respects with the terms of
the Agreement and the other Production Payment Documents.
2. Schedule I attached hereto sets forth information, data and
computations relating to Seller's Hydrocarbons and the Production Payment
Hydrocarbons, all of which information, data and computations are true,
complete and correct as of the date set forth therein.
IN WITNESS WHEREOF, I have hereunto set hand as of this ___ day of
_______________, 199___.
GEORESOURCES, INC.
By:
Name:
Title:
Schedule I
to
Monthly Hydrocarbon Report
(as of _____________, 199__)
Actual Production Scheduled Oil Residual
Month Oil (bbls) Volumes (bbls) Hydrocarbons
Dec-97 2,325
Jan-98 2,325
Feb-98 2,100
Mar-98 2,325
Apr-98 2,250
May-98 2,325
Jun-98 2,250
Jul-98 2,325
Aug-98 2,325
Sep-98 2,250
Oct-98 2,325
Nov-98 2,250
Totals 27,375
Well Information:
Wells on Production = ________
Well Activity (Drilling, Workover and/or Abandonment):
ANNEX IV
TO
PURCHASE AGREEMENT FOR VOLUMETRIC PRODUCTION PAYMENT
Wire Transfer Instructions for Purchase:
FUNDS TO BE PAID TO SELLER SHALL BE WIRE TRANSFERRED TO THE FOLLOWING ACCOUNT:
NAME OF COMPANY GeoResources, Inc.
P.O. Box 1505
Williston, ND 58802
1-701-572-2020
NAME OF BANK Norwest Bank Minnesota, NA
Beneficiary Bank
Norwest Bank Montana, NA
Billings Downtown Office
Billings, Montana
ACCOUNT NUMBER 513527
ABA ROUTING NUMBER 091000019
ANNEX V
TO
PURCHASE AGREEMENT FOR VOLUMETRIC PRODUCTION PAYMENT
[Intentionally Omitted]
ANNEX VI
to
Purchase Agreement for Volumetric Production Payment
Insurance Requirements
1.0 The Borrower shall maintain the following insurance during the term of
the Credit Agreement:
1.1 Worker's Compensation, (including Occupational Disease) insurance
in accordance with applicable law and EMPLOYER'S LIABILITY
insurance with a minimum limit of $1,000,000 for any one
occurrence.
1.2 Commercial General Liability Insurance, with a minimum combined
single limit of $3,000,000 per occurrence for Bodily Injury and
Property Damage and a $3,000,000 aggregate. This insurance must
include Contractual Liability coverage.
1.3 Automobile Liability Insurance, covering all owned, non owned,
Leased and hired vehicles with a minimum combined single limit for
Bodily Injury and Property Damage of $1,000,000 per accident.
This insurance must include Contractual Liability coverage.
The limits specified in 1.1, 1.2 and 1.3 above may be satisfied with a
combination of primary and Umbrella/Excess Insurance.
2.0 Policy Endorsements
2.1 The above insurance shall include a requirement that the insurer
provide Koch Producer Services with thirty (30) days' written
notice prior to the effective date of any cancellation or material
change of the insurance.
2.2 The insurance specified in Sections 1.2 and 1.3 hereof shall name
Koch Producer Services as an additional insured and shall be
primary to and not in excess of or contributory with any other
insurance available to Koch Producer Services.
3.0 Evidence of Insurance - Borrower shall, before commencement of this
Credit Agreement, provide Koch Producer Services with a certificate,
satisfactory to Koch Producer Services, evidencing the insurance coverages and
endorsements set forth above. If requested by Koch Producer Services,
Borrower shall provide Koch Producer Services with certified copies of all
policies.
4.0 Waiver of Subrogation
4.1 The insurance specified in Section 1.2 and 1.3 hereof shall
contain a waiver of the right of subrogation against Koch Producer
Services.
4.2 The insurance specified in Section 1.1 hereof shall contain a
waiver of the right of subrogation against Koch Producer Services
and an assignment of statutory lien, if applicable.
ANNEX VII
Definitions
In addition to such other defined terms as may be set forth in this
Purchase Agreement and the Conveyance of Volumetric Production Payment as used
in the Conveyance and in the Purchase Agreement, the following terms have the
following respective meanings:
"Alternate Delivery Point Amount" means, for each Alternate
Delivery Point, an amount equal to the product of (A) the actual
quantity of Oil (stated in Barrels) delivered to such Alternate
Delivery Point during such Month times (B) the actual increased
costs and expenses per barrel incurred by or charged to Production
Payment Owner resulting from Delivery of Production Payment
Hydrocarbons at an Alternate Delivery Point instead of a Delivery
Point, including without limitation additional transportation fees
charged by third parties in arms length transactions.
"Alternate Delivery Points" means those points (other than a
Delivery Point) mutually acceptable to Working Interest Owner and
Production Payment Owner at their discretion where Oil is delivered to
Production Payment Owner pursuant hereto; and "Alternate Delivery Point"
shall mean a single one of such points.
"API" means the American Petroleum Institute.
"ASTM" means the American Society for Testing Materials.
"Barrel of Oil" means 42 United States standard gallons of 231
cubic inches per gallon of Oil at a temperature of 60 degrees
Fahrenheit.
"Capitalized Lease Liabilities" means all monetary obligations of
the Working Interest Owner under any leasing or similar arrangement
which, in accordance with generally accepted accounting principles,
would be classified as capitalized leases, and, for purposes of each
Production Payment Document, the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with generally
accepted accounting principles, and the stated maturity thereof shall be
the date of the last payment of rent or any other amount due under such
lease prior to the first date upon which such lease may be terminated by
the lessee without payment of a penalty.
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"Contingent Liability" means any agreement, undertaking or
arrangement by which Working Interest Owner guarantees, endorses or
otherwise becomes or is contingently liable upon (by direct or indirect
agreement, contingent or otherwise, to provide funds for payment, to
supply funds to, or otherwise to invest in, a debtor, or otherwise to
assure a creditor against loss) the indebtedness, obligation or any
other liability of any other Person (other than by endorsements of
instruments in the course of collection), or guarantees the payment of
dividends or other distributions upon the shares of any other Person.
The amount of any Person's obligation under any Contingent Liability
shall (subject to any limitation set forth therein) be deemed to be the
outstanding principal amount (or maximum principal amount, if larger) of
the debt, obligation or other liability guaranteed thereby. Contingent
Liability shall not include any amounts by which a Working Interest
Owner or operator might become liable solely as a result of obligations
concerning operations under an oil and gas operating agreement, or for
liabilities concerning any entity for which Production Payment owner
must consent to an assignment under Section 20 of the Purchase
Agreement.
"Conveyance" means that certain Conveyance of Volumetric
Production Payment, dated effective as of December 3, 1997, between the
Working Interest Owner and the Production Payment Owner, as it from time
to time hereafter may be modified, supplemented or amended.
"Credit Supplier" means any person or entity from time to time
financing or refinancing (whether through debt or equity, or both) the
acquisition of the production payment or any other assets from time to
time owned or held by the Production Payment Owner.
"Crude Oil Purchase Agreement" shall have the meaning set forth in
Section 2 of the Purchase Agreement.
"Current Reserve Report" means those certain reports described in
Section 3(t) of the Purchase Agreement, or any subsequent reserve
reports.
"Default" means any event, act or condition which with notice or
lapse of time, or both, would constitute an Event of Default.
"Delivery Points" means those points set forth on Schedule I to
the Conveyance with respect to the volumes set forth in such Schedule I
for each month; and "Delivery Point" means a single one of such points.
"Effective Date" means December 1, 1997, at 7:00 A.M., determined
as to each locality in accordance with the time then generally observed
in such locality.
"Environmental Laws" means all applicable federal, state or local
statutes, laws, ordinances, codes, rules, policies, directives, orders,
judgments, decisions, regulations and guidelines (including consent
decrees and administrative orders) relating to public health and safety
and protection of the environment.
"Event of Default" means each of the following events and
occurrences:
A. Any warranty or representation made by the Working
Interest Owner in any Production Payment Document is untrue in any
material respect when made.
B. A material default in the due performance by the
Working Interest Owner of any covenant or express agreement
contained in any Production Payment Document (other than violation
of the Production Schedule) and continuation of such material
default beyond the applicable grace period expressly granted in
such Production Payment Document, if any, with respect thereto.
C. Production of Hydrocarbons from the Subject Interests
shall be less than an aggregate of 75 barrels for a period of at
least thirty days, unless such reduced production level is caused
by a condition of Force Majeure.
D. The resignation, removal or other inability of Working
Interest Owner to serve as operator of the Subject Interests or
Working Interest Owner's failure to act as operator of the Subject
Interests.
E. The Working Interest Owner shall (i) become insolvent
or generally fail to pay, or admit in writing his inability or
unwillingness to pay, debts as they become due; (ii) apply for,
consent to, or acquiesce in, the appointment of a trustee,
receiver, sequestrator or other custodian for the Working Interest
Owner, the Subject Interests or any other property thereof, or
make a general assignment for the benefit of creditors; (iii) in
the absence of such application, consent or acquiescence, permit
or suffer to exist the appointment of a trustee, receiver,
sequestrator or other custodian for the Working Interest Owner, or
for a substantial part of the Subject Interests or other property
thereof, and such trustee, receiver, sequestrator or other
custodian shall not be discharged within 60 days, provided that
the Working Interest Owner hereby expressly authorizes the
Production Payment Owner to appear in any court conducting any
relevant proceeding during such 60-day period to preserve, protect
and defend its rights under this Agreement and the other
Production Payment Documents; (iv) permit or suffer to exist the
commencement of any bankruptcy, reorganization, debt arrangement
or other case or proceeding under any bankruptcy or insolvency
law, or any dissolution, winding up or liquidation proceeding, in
respect of such Working Interest Owner and, if any such case or
proceeding is not commenced by the Working Interest Owner, such
case or proceeding shall be consented to or acquiesced in by the
Working Interest Owner, or shall result in the entry of an order
for relief or shall remain for 60 days undismissed, provided that
the Working Interest Owner hereby expressly authorizes the
Production Payment Owner to appear in any court conducting any
such case or proceeding during such 60-day period to preserve,
protect and defend its rights under this Agreement and the other
Production Payment Documents; or (v) take any action authorizing,
or in furtherance of, any of the foregoing.
F. The Make-Up Volume Balance shall at any time exceed
the then Maximum Makeup Volume Balance Amount unless within five
(5) days from receipt of request for payment by Production Payment
Owner, the Working Interest Owner shall pay to the Production
Payment Owner in additional barrels of Subject Hydrocarbons an
amount for application on the Make-Up Volume Balance such that it
shall be reduced to an amount not in excess of the then Maximum
Make-Up Volume Balance Amount.
G. Any occurrence and continuation, in Production Payment
Owner's reasonable opinion, of a Material Negative Reservoir
Event.
"Exhibit A" means Exhibit A attached to the Conveyance.
"Expense Amount" means an amount equal to the aggregate of all
expenses paid or incurred by Production Payment Owner during such Month
which consist of, or are incidental to, without duplication, (1)
complete discharge and/or reconveyance of the Production Payment,
including, without limitation, the reasonable fees and out-of-pocket
expenses paid by Production Payment Owner of accountants and counsel
employed by Production Payment Owner in connection therewith; (2) any
Production Expenses reasonably incurred by the Production Payment Owner
in paying or performing any obligations on behalf of Working Interest
Owner hereunder or under any of the other Production Payment Documents;
(3) any costs, expenses or other amounts reasonably incurred by the
Production Payment Owner in paying or performing any obligations on
behalf of Working Interest Owner hereunder or under any of the other
Production Payment Documents; (4) actual transaction costs associated
with cancellation of hedging and futures contracts, including brokers
fees, exchange expenses, document expenses and related charges, or (5)
actual costs resulting from transportation fee adjustments charged by
third parties in arms length transactions, relating to any changes in
delivery times or locations, which are not included in the Alternate
Delivery Point Amount.
"Force Majeure" means acts of God, governmental action, strikes,
lockouts or other industrial disturbances, acts of the public enemy,
wars, blockades, insurrections, riots, epidemics, landslides, lightning,
earthquakes, fires, hurricanes, tornadoes, storms, storm warnings,
floods, washouts, freezes, arrests and restraints of governments and
people, civil disturbances, explosions, breakage of, or accidents to,
lines of pipe or subsurface storage caverns regardless of how caused,
mechanical failure of machinery or equipment (unless such mechanical
failure is as a result of failure of Working Interest Owner to maintain
such equipment as required pursuant to Section 5(r)(iii) of the Purchase
Agreement), transportation curtailment and any other causes, whether of
the kind herein enumerated or otherwise and whether foreseeable or
unforeseeable, not within the reasonable control of the party claiming
suspension (including, but not limited to, acts of negligence or willful
misconduct of third parties) and which by the exercise of due diligence
such party is unable to prevent or overcome; provided, however, that
"force majeure" shall not include any failure or inadequacy of reserves
or a failure to pay monetary obligations. A condition of force majeure
shall continue for so long as a party is unable to overcome the
resulting consequences through exercise of reasonable diligence.
"GAAP" shall have the meaning set forth in Section 5(l) of the
Purchase Agreement.
"Hazardous Material" means (i) any "hazardous substance", as
defined by CERCLA; (ii) any "hazardous waste", as defined by the
Resource Conservation and Recovery Act, as amended; and (iii) any
pollutant or contaminant or hazardous, extremely hazardous, dangerous or
toxic chemical, material or substance within the meaning of any
applicable federal, state or local law, regulation, ordinance or
requirement (including consent decrees and administrative orders)
relating to or imposing liability or standards of conduct concerning any
hazardous, toxic or dangerous waste, substance or material, all as
amended or hereafter amended.
"Highest Lawful Rate" shall have the meaning set forth in Section
22 of the Purchase Agreement.
"Hydrocarbons" means, collectively, crude oil, condensate and
other liquid hydrocarbons, but not natural gas or liquid products
extracted from gas by means other than conventional field separation.
"Impermissible Qualification" means, relative to the opinion or
certification of any independent public accountant as to any financial
statement of the Working Interest Owner, any qualification or exception
to such opinion or certification: (a) which is of a "going concern" or
similar nature; (b) which relates to the limited scope of examination of
matters relevant to such financial statement; or (c) which relates to
the treatment or classification of any item in such financial statement
and which, as a condition to its removal, would require an adjustment to
such item the effect of which would be to cause the Working Interest
Owner to be in default of any of his financial covenants, if any.
"Indebtedness" means, with respect to any Person, without
duplication, (a) all obligations of such Person for borrowed money and
all obligations of such Person evidenced by bonds, debentures, notes or
other similar instruments; (b) all obligations, contingent or otherwise,
relative to the face amount of all letters of credit, whether or not
drawn, and banker's acceptances issued for the account of such Person;
(c) all obligations of such Person as lessee under leases which have
been or should be, in accordance with generally accepted accounting
principles, recorded as Capitalized Lease Liabilities; (d) all other
items which, in accordance with generally accepted accounting
principles, would be included as liabilities on the liability side of
the balance sheet of such Person as of the date at which Indebtedness is
to be determined; (e) whether or not so included as liabilities in
accordance with generally accepted accounting principles, all
obligations of such Person to pay the deferred purchase price of
property or services, and indebtedness (excluding prepaid interest
thereon) secured by a Lien on property owned or being purchased by such
Person (including indebtedness arising under conditional sales or other
title retention agreements), whether or not such indebtedness shall have
been assumed by such Person or is limited in recourse; and (f) all
Contingent Liabilities of such Person in respect of any of the
foregoing.
"Indemnified Amount" means an amount equal to the aggregate amount
of all Indemnified Liabilities (as defined in Section 25 of the Purchase
Agreement) that become owing to any Indemnified Party during such Month
under the Purchase Agreement which have not previously been paid by the
Working Interest Owner;
"Indemnified Party" means the Production Payment Owner, any Credit
Supplier, and any of their respective members, officers, employees,
agents, shareholders, directors, advisors or affiliates who are entitled
to assert an indemnity under the provisions of this Purchase Agreement.
"Independent Reserve Report" has the meaning set forth in Section
5(f)(vi) of the Purchase Agreement.
"Index Price" in any Month shall be a price per Barrel of Oil for
said Month equal to Koch Oil Company's posting for North Dakota sour
Crude Oil, gravity delivered plus $2.75, assumed to be priced in equal
daily quantities.
"Interest Amount" means, for any Month, the sum of the amounts of
interest which would have accrued each day during such Month (assuming
interest at the Specified Rate in effect at the end of such day) on an
amount equal to the sum, without duplication, on such day of (i) the
Make-Up Volume Balance at the beginning of such Month plus (ii) the sum
of each Tax Amount, Expense Amount, Volumetric Shortfall Amount, the
Alternate Delivery Point Amount, Indemnified Amount, Post Default Amount
and Quality Adjustment Amount which have been paid or incurred by
Production Payment Owner during such Month minus (iii) the amounts, if
any, in respect of the amounts referred to in the foregoing clauses (i)
and (ii) for which the Working Interest Owner shall have reimbursed the
Production Payment Owner in cash during such Month; provided that solely
for the purposes of determining the Interest Amount, in respect of any
Month on or after the time of an acceleration of the Scheduled Volumes
under Section 15 of the Purchase Agreement, the Post Default Amount
shall be deemed not to include amounts, if any, accruing in respect of
Scheduled Volumes prior to the time such volumes are scheduled to be
delivered under Schedule I to the Conveyance.
"Lease Use Hydrocarbons" means any Hydrocarbons which are
unavoidably lost in the production thereof or used by Working Interest
Owner or the operator of the Subject Interests in conformity with good
field practices in drilling or producing operations (including gas
injection, secondary recovery, pressure maintenance, repressuring or
cycling operations) conducted for the purpose of producing Hydrocarbons
from the Subject Interests, but only for so long as and to the extent
such Hydrocarbons are so used.
"Make-Up Delivery Amount" means an amount equal to the product of
(A) the positive difference, if any, of (i) the actual quantity of
Production Payment Hydrocarbons delivered to Production Payment Owner
during such Month, minus (ii) the Scheduled Volumes to be delivered
during such Month, times (B) the Index Price for the Month in which the
Oil is delivered.
"Make-Up Volume Balance" means, at the end of any Month, the sum,
without duplication, of (A) the Tax Amount, plus (B) the Expense Amount,
plus (C) the Volumetric Shortfall Amount, plus (D) the Alternate
Delivery Point Amount, plus (E) the Indemnified Amount, plus (F) the
Quality Adjustment Amount for such Month, plus (G) the Post Default
Amount for such Month, plus (H) an amount equal to the Interest Amount
for such Month, plus (I) the Make-Up Volume balance as of the beginning
of such Month, minus (J) the Make-Up Delivery Amount, if any, in respect
of such Month, and (K) minus amounts for which Working Interest Owner
has reimbursed Production Payment Owner as provided in the following
proviso; provided, however, that at his option, the Working Interest
Owner may pay to Production Payment Owner, in cash, all or any portion
of the foregoing amounts for such Month or any previous Month, which
cash payments shall directly reduce the Make-Up Volume Balance, and
provided further that for purposes hereof, the Make-Up Volume Balance as
of the date hereof shall be deemed to be zero; and provided further that
notwithstanding anything to the contrary herein, the Make-Up Volume
Balance shall never be an amount less than zero.
"Make-Up Volumes" means those volumes which have been delivered
each Month to reduce the Make-Up Volume Balance.
"Material Negative Reservoir Event" means any reservoir
discrepancy or problem which results in or could reasonably be expected
to result in a materially downward reevaluation of reserves in the
aggregate for the life of the reservoirs, as determined using the
standards provided in the Independent Reserve Report delivered pursuant
to Section 5(f)(vi) of the Purchase Agreement, loss of reservoir
pressure, reservoir damage, or similar problem or matter which could
reasonably be expected to impair the Working Interest Owner's ability to
produce and deliver the Production Payment Hydrocarbons in accordance
with the Production Schedule.
"Maximum Make-Up Volume" means in respect of any Month that volume
of production from the Subject Interests for such Month equal to the
positive difference, if any, of (i) 75% of the actual volumes of oil
produced from the Subject Interests during such Month minus (ii) the
Scheduled Volumes for such Month.
"Maximum Make-Up Volume Balance Amount" means $100,000.
"Memorandum of Agreement relating to Purchase of Crude Oil" means
that certain Memorandum of Agreement relating to Purchase of Crude Oil,
in form and substance acceptable to Purchaser, as it from time to time
hereafter may be modified, supplemented or amended.
"Month" means a calendar month.
"Non-Consent Hydrocarbons" means those Hydrocarbons produced from
a well during the applicable period of recoupment or reimbursement
pursuant to a non-consent provision covering the relevant well or wells,
which Hydrocarbons have been relinquished to the consenting party or
participating party under the terms of such non-consent provision as the
result of the election by Working Interest Owner not to participate in
the particular operation; provided such election by Working Interest
Owner has been made in good faith and as a prudent operator.
"Oil" means, collectively, crude oil, condensate and other liquid
hydrocarbons but not natural gas or liquid products extracted from gas
by means other than conventional field separation.
"Oil Buyer" means Koch Oil Company, or its assigns as purchaser
under that Crude Oil Purchase Agreement, dated effective as of December
1, 1997, in which Working Interest Owner is the seller.
"Oil and gas leases" shall include oil, gas and mineral leases and
shall also include subleases and assignments of operating rights, but
shall not include operating rights under a standard onshore oil and gas
operating agreement.
"Operating Taxes and Fees" means the following taxes and fees (and
any penalties and interest associated therewith), without duplication,
which relate to the Subject Interests: (i) real property taxes, (ii)
personal property taxes, (iii) renewal fees for permits, (iv) sales
taxes and (v) renewal fees for business licenses or other permits that
are necessary for the Working Interest Owner to operate and to perform
his duties under any of the Production Payment Documents.
"Permitted Liens" means (1) taxes constituting a lien but not yet
due and payable or which are being contested diligently, in good faith;
(2) defects or irregularities in title, and liens, charges or
encumbrances, which are not such as to interfere materially with the
development, operation or value of the Subject Interests and not such as
materially to impair title thereto; (3) the liens, if any, granted in
favor of any Credit Supplier by Production Payment Owner; (4) any lien
or encumbrance created as a consequence of the execution and delivery of
the Conveyance; (5) operators liens and materialmen and mechanics liens
arising out of normal operation of the Subject Interests, securing
amounts which are not more than 60 days past due provided the Persons
entitled to the benefits of such liens are not exercising remedies in
respect thereof other than the making of demands or the giving or filing
of notices required to perfect such liens or suing for payment of the
amounts secured thereby; (6) royalty burdens and similar encumbrances on
the Subject Interests in existence on the Effective Date, and which are
reflected in the net revenue interests listed on Exhibit "A" of the
Conveyance; (7) liens being contested by Working Interest Owner in good
faith in such manner as not to jeopardize Production Payment Owner's
rights in and to the Production Payment and the Production Payment
Hydrocarbons provided the Persons entitled to the benefits of such liens
are not executing on such liens or any judgments in respect thereof; and
(8) those liens consented to in writing by Production Payment Owner.
"Person" means any natural person, corporation, partnership, joint
venture, trust, firm, association, government, governmental agency or
any other entity, whether acting in an individual, fiduciary or other
capacity.
"Plan of Development" means the Plan of Development attached as
Schedule III to the Purchase Agreement.
"Post Default Amount" means an amount equal to those additional
amounts which Working Interest Owner may owe Production Payment Owner
under Paragraph C of Section 15 of the Purchase Agreement after an Event
of Default under the Purchase Agreement, which has not been timely cured
after proper notice of the same, as provided in Section 15 of the
Purchase Agreement.
"Prime Rate" means a rate of interest per annum equal to the
"Prime Rate" as correctly published in the "Money Rates" section of the
"Money and Investment" section of the Wall Street Journal; provided that
with respect to Saturday and Sunday or any other day on which such
quotation is unavailable, the quotation available on the last preceding
day on which the Wall Street Journal was published shall be used;
provided, further, that if such quotation is no longer available, then a
quotation from another publication reasonably designated by Production
Payment Owner and accepted by Working Interest Owner (which acceptance
shall not be unreasonably withheld) shall be used.
"Production Expenses" means for purposes of the Production Payment
Documents for any period, without duplication, all fees, expenses and
other obligations incurred in the ordinary course of business of the
Working Interest Owner or in connection with operating the Subject
Interests including, without limitation, (i) rental payments under site
leases and leases of equipment or vehicles, (ii) utilities, (iii)
insurance premiums in connection with the Subject Interests or any
equipment located thereon and utilized in operating, producing,
reworking or maintaining the Subject Interests, (iv) fees for
accounting, billing or other administrative services provided by third
parties, including, without limitation, the preparation of any reserve
report, including the Independent Reserve Report, (v) expenses for
office supplies and equipment, (vi) all (A) compensation (including
without limitation, wages, bonuses, vacation pay or pay for other
compensated absences), (B) withholding, social security and other
payroll burdens (including, without limitation, FICA and employment
taxes), (C) workers compensation insurance deposits and premiums and the
costs of claims, (D) benefits and contributions (including, without
limitation, medical insurance benefits), and all accruals with respect
to any of the foregoing, to the extent they relate to employees of the
Working Interest Owner, (vii) field expenses of lifting, handling,
gathering, producing, treating, storing, marketing or gathering of the
Subject Hydrocarbons, (viii) overhead chargeable under applicable
operating agreements covering the Subject Interests, (ix) compensation
to well operators, consultants and others necessary for and related to
operating, producing, reworking and maintaining the Subject Interests,
(x) costs of plugging and abandoning wells, (xi) shut-in, minimum or
advance royalties and (xii) all other fees and expenses directly
associated with or arising from the operations of the Working Interest
Owner or in connection with the Subject Interests. "Production
Expenses" shall not include Working Interest Owner Operating Taxes and
Fees or Taxes and Fees. "Production Expenses" shall not include any
amounts in respect of Capitalized Lease Liabilities, capital
expenditures or expenses that are classified as intangible drilling
expenses under federal income tax and regulations unless failure to pay
such Capitalized Lease Liabilities, capital expenditures or expenses, as
the case may be, might entitle any Person to assert a lien or claim in
respect thereof against all or any portion of the Production Payment or
the Subject Interests (whether or not such lien or claim is in fact so
asserted).
"Production Payment" has the meaning stated in Section 1 of the
Conveyance.
"Production Payment Documents" means the Conveyance, the Purchase
Agreement, the Memorandum of Agreement relating to Purchase of Crude Oil
and any other document or agreement executed in connection with such
agreements, as each from time to time hereafter may be modified,
supplemented or amended.
"Production Payment Hydrocarbons" means the Hydrocarbons conveyed
to Production Payment Owner pursuant to the Conveyance and shall include
Scheduled Volumes and Make-Up Volumes, as the same may be adjusted from
time to time as set forth in Sections 1 and 2 of the Conveyance, which
shall accrue or be attributable to the Production Payment; provided,
however, that Production Payment Hydrocarbons shall not include (I) Non-
Consent Hydrocarbons where the Working Interest Owner is the non-
consenting party or (ii) Lease Use Hydrocarbons.
"Production Payment Owner" is defined in the Conveyance and shall
include successors and assigns.
"Production Sale Contracts" means contracts for the sale of
Subject Hydrocarbons now in effect or hereafter entered into by Working
Interest Owner with Production Payment Owner's written consent.
"Production Schedule" means the schedule of production relating to
the Production Payment Hydrocarbons set forth in Schedule I to the
Conveyance.
"Production Taxes" means (1) ad valorem taxes (or taxes imposed in
lieu thereof) imposed or assessed upon the Production Payment or any
mortgage thereof, or upon the Production Payment Hydrocarbons; (2)
severance, gross production, occupation, extraction, gathering, and
other taxes and assessments of any kind (other than taxes on or measured
by the income of Production Payment Owner and other than franchise taxes
of Production Payment Owner) imposed or assessed with respect to or
measured by or charged against the Production Payment or the Production
Payment Hydrocarbons; and (3) all other taxes required by law to be
deducted from the proceeds of the Production Payment Hydrocarbons.
"Proved Developed Producing Reserves" means, with respect to the
Subject Interests, those quantities of Hydrocarbons, estimated with
reasonable certainty, as demonstrated by geological and engineering data
set forth in the Current Reserve Report or, if applicable, the then most
recent Independent Reserve Report delivered pursuant to Section 5(f)(vi)
of the Purchase Agreement, to be economically recoverable based upon the
prices set forth in that Independent Reserve Report from the Subject
Interests by standard producing methods under existing regulatory
practices and economic conditions using existing conventional equipment
and operating methods from existing completion intervals open for
production on the effective date of the evaluation.
"Purchase Agreement" means that certain Purchase Agreement for
Volumetric Production Payment, dated as of December 3, 1997, between the
Working Interest Owner and the Production Payment Owner, as from time to
time hereafter may be modified, supplemented or amended.
"Purchaser" means the Production Payment Owner and shall include
its successors and assigns.
"Quality Adjustment Amount" means, for any Month, an amount equal
to the sum of all penalties and deductions for nonconformity of Oil
delivered at an Alternate Delivery Point to the Quality Standards, plus
the sum of all reasonable costs and expenses incurred or paid by
Production Payment Owner for treating Production Payment Hydrocarbons
delivered during such Month to satisfy such Quality Standards.
"Quality Standards" means the quality requirements and
specifications set forth in Schedule I to the Purchase Agreement with
respect to Oil at each Delivery Point or Alternate Delivery Point, as
the same may be modified from time to time.
"Release" means a "release", as such term is defined in CERCLA and
any other spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping or disposing of a
substance into the environment.
"Residual Hydrocarbons" means for any period of time the volume of
all Hydrocarbons produced from the Subject Interests less the volume of
Production Payment Hydrocarbons delivered in kind to the Production
Payment Owner during the same period of time.
"Resource Conservation and Recovery Act" means the Resource
Conservation and Recovery Act, 42 U.S.C. Section 690, et seq., as in
effect from time to time.
"Scheduled Volumes" means the number of Barrels of Oil with
respect to any Delivery Point set forth in the Production Schedule
hereto, as such amounts may be rescheduled as provided in the Conveyance
or the Purchase Agreement.
"Seller" is defined in the Purchase Agreement, and shall mean
Working Interest Owner and its successors and assigns.
"Servicer" shall have the meaning set forth in Section 26 of the
Purchase Agreement.
"Specified Rate" shall have the meaning set forth in Section 21 of
the Purchase Agreement.
"Subject Hydrocarbons" means all Hydrocarbons in and under, and
which may be produced and saved from, and which shall accrue or be
attributable to the Subject Interests and which are produced after the
Effective Date (other than Lease Use Hydrocarbons and Non-Consent
Hydrocarbons where Working Interest Owner is the non-consenting party).
"Subject Hydrocarbons" and "Production Payment Hydrocarbons,"
respectively, shall be deemed to include the proceeds of such
Hydrocarbons.
"Subject Interests" means Working Interest Owner's right, title
and interest in the Oil and gas leases and the leasehold working
interests, described in Exhibit A to the Conveyance, together with all
Hydrocarbons severed during the term of this Production Payment which
are attributable to such leases and interests; together with Working
Interest Owner's right, title and interest, if any, in, to and under, or
derived from, all of the valid Subject Hydrocarbons unitization and
pooling agreements which are described in such Exhibit A or which relate
to any of the properties and interests described in such Exhibit A. The
term "Subject Interest," when used with reference to any particular
Subject Interest, shall mean and include Working Interest Owner's right,
title and interest in (i) such Subject Interest as the same may be
enlarged or diminished by the provisions of any contract or other
instrument described in Exhibit A to the Conveyance, or by the removal
of any charges or encumbrances to which such Subject Interest is
subject, (ii) any and all renewals, replacements and extensions of such
Subject Interest, or other interests in the Hydrocarbons in, under and
that may be produced from lands comprising a portion of the Subject
Interests acquired by Working Interest Owner during the term hereof,
(iii) all contracts supplemental to or amendatory of or in substitution
for the contracts described above insofar as the same relate to such
Subject Interest, and (iv) all rights, titles and interests accruing or
attributable to such Subject Interest by virtue of its being included in
any unit.
"Tax Amount" means an amount equal to the aggregate of all
amounts, including interest and penalties, if any, relating thereto,
paid by Production Payment Owner, in such Month, and which have not been
paid by Working Interest Owner pursuant to the provisions of Section 5
of the Purchase Agreement, on account of, without duplication, (1)
Production Taxes, (2) any excise tax imposed on or assessed with respect
to or measured by or charged against the Production Payment or the
Production Payment Hydrocarbons, or (3) any sales or gross receipts
taxes, which are imposed on Production Payment Owner by any state or
federal governmental unit, or any political subdivision thereof, in
which any of the Subject Interests are located, and which are payable on
account of Production Payment Owner's ownership of the Production
Payment or receipt of Production Payment Hydrocarbons, provided however,
that the Tax Amount shall not include any taxes associated with the
handling, transportation, refining, purchase or sale of Production
Payment Hydrocarbons after they have been delivered to the credit of
Production Payment Owner.
"Taxes and Fees" means with respect to the Working Interest Owner
the following taxes, fees (including license fees), charges, duties,
levies or other assessments, and all penalties and interest associated
therewith, imposed by any governmental authority on the Working Interest
Owner, without duplication: (i) income tax (whether federal, state or
local or otherwise), (ii) excise, excess profit, and occupational taxes,
and (iii) all other taxes payable by the Working Interest Owner which
are based in whole or in part on the Working Interest Owner's income or
capitalization or which are required to be paid to maintain the
privilege and power of the Working Interest Owner to operate his
business.
"Trading Day" means any day on which futures contracts are traded
in the New York Mercantile Exchange.
"Trading Month" means each monthly delivery period covered by a
distinct set of futures contracts traded in the New York Mercantile
Exchange or equivalent contracts.
"Volumetric Shortfall" shall have occurred on the last day of each
Month during which the actual quantities of Oil delivered to a Delivery
Point or Alternate Delivery Point, as the case may be, are less than the
Scheduled Volumes for such applicable Delivery Point or Alternate
Delivery Point for such period of time.
"Volumetric Shortfall Amount" means an amount equal to for each
Delivery Point, the product of (A) the positive difference, if any, of
(i) the Scheduled Volumes to be delivered to such Delivery Point for the
Month in which a Volumetric Shortfall occurs minus (ii) the actual
quantity of Oil delivered to such respective Delivery Point for the
Month in which a Volumetric Shortfall occurs, times (B) the Index Price
for the Month in which a Volumetric Shortfall occurs.
"Working Interest Owner" is defined in the Conveyance and shall
include successors and assigns.
ANNEX VIII
TO
PURCHASE AGREEMENT FOR VOLUMETRIC PRODUCTION PAYMENT
Form of Purchaser's Monthly Report
(as of __________, 199___)
EXAMPLE
- -----------------------------------------------------------------------------
1997 | Actual | Scheduled | Volumetric | Make-Up | *Index Price
| Volume | Volumes | Shortfall | Volumes |
| | | Volumes(-) | (+) |
| | | | |
| | | | |
| (a) | (b) | (c)=(a)-(b) | (d)=(a)-(b) | (e)
Month| Oil(bbls) | Oil(bbls) | Oil(bbls) | Oil(bbls) | ($/bbl)
- -----------------------------------------------------------------------------
Jan | 30,000 | 30,000 | | |
Feb | 29,000 | 30,000 | -1,000 | | $16
Mar | 28,000 | 30,000 | -2,000 | | $17
Apr | 30,000 | 30,000 | | |
May | 30,000 | 30,000 | | |
Jun | 30,000 | 30,000 | | |
July | 31,000 | 30,000 | | 1,000 | $15
Aug | 32,000 | 30,000 | | 2,000 | $16
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
$ Expenses
| | | | | |
Tax | Expense | Volumetric| Alternate| Indemnified| Quality | Post
Amount| Amount | Shortfall | Delivery | Amount | Adjustment| Default
| | Amount | Point | | Amount | Amount
| | (h)=(c) X | Amount | | |
(f) | (g) | (e) | (i) | (j) | (k) | (l)
- -----------------------------------------------------------------------------
| | $0 | | | |
| | ($16,000) | | | |
| | ($34,000) | | | |
| ($10,000) | $0 | | | |
| | $0 | | | |
| | $0 | | | |
| | $0 | | | |
| | $0 | | | |
- -----------------------------------------------------------------------------
- ---------------------------------------------------
Make-Up | Make-Up | Interest | Make-Up |
Delivery | Volume | Amount | Volume |
Amount | Balance | | Balance |
| | | |
| (Inc.)/Dec | | |
(m)= | (n)=Sum | | |
(d)X (e) | (f : m) | (o) | (p)= (n) + (o)|
- ---------------------------------------------------
$0 | $ | $0.00 | $0.00 |
$0 | ($16,000) | ($6.47) | ($16,006.47) |
$0 | ($34,000) | ($214.26) | ($50,220.72) |
$0 | ($10,000) | ($730.07) | ($60,950.80) |
$0 | $0 | ($763.55) | ($61,714.35) |
$0 | $0 | ($748.18) | ($62,462.53) |
$15,000 | $15,000 | ($679.45) | ($48,141.98) |
$32,000 | $32,000 | ($383.26) | ($16,525.24) |
- ---------------------------------------------------
* "Index Price" shall mean, as used in this Schedule I to Monthly Hydrocarbon
Report, the Index Price, as applicable, used in the calculation of either the
Volumetric Shortfall Amount or Make-Up Delivery Amount, as applicable, as
provided for in the Purchase Agreement.
Assumptions:
1. Column b Scheduled Volumes represent Volumetric Production Payment Volumes
that Seller is obligated to deliver to Purchaser.
2. Column a represents Actual Volumes delivered by Seller. IN February and
March, Seller does not deliver all of Scheduled Volumes resulting in
Volumetric Shortfall Volumes (column c). Purchaser may go into the market and
purchase an amount equal to Volumetric Shortfall and pay an Index Price at
time of purchase (column e). Assuming Purchaser does purchase barrels in open
market, Seller is charged Volumetric Shortfall Amount (column h) which is
added to Make-Up Volume Balance (column p).
3. Seller does not obtain independent reserve report. Purchaser pays $10,000
for reserve report on April 1 and charges Seller for the Expense Amount
(column g) which is added to Make-Up Volume Balance (column p).
4. Seller is charged interest (column o) on Make-Up Volume Balance. Interest
is calculated at floating Prime +6% on an actual day/365 day basis
(i.e. 14.75% assumed in this example). Since Seller has until last day of
month to deliver Scheduled Volumes, interest is charged for last day of month
only in month when a Volumetric Shortfall occurs (i.e. February interest
expense is calculated as follows: Volumetric Shortfall amount of $16,000
(column h) multiplied times 14.75% interest rate divided by 365 days
multiplied times 1 day (last day of February) equals $6.47 February interest
expense (column o). March Interest Amount includes interest for the full
month on previous month's Make-Up Volume Balance plus one day of interest on
March Volumetric Shortfall.
5. Seller delivers Make-Up Volumes on July 15 and August 15 (column d) and
receives a credit for these volumes at the Index Price (column e). Total
credit amount is equal to Make-Up Delivery Amount (column m). Make-Up Volume
Balance (column p) is reduced by Make-Up Volume Deliver Amount (column m).
NOTE THIS EXAMPLE IS FOR ILLUSTRATIVE PURPOSES ONLY; SELLER MAY BE LIABLE FOR
SWAP BREAKAGE COSTS ALSO.
SCHEDULE I
TO
PURCHASE AGREEMENT FOR VOLUMETRIC PRODUCT PAYMENT
QUALITY STANDARDS
Oil:
The Oil delivered to the Production Payment Owner as part of the Production
Payment Hydrocarbons shall in all events be of such quality that it shall meet
at least the following specifications:
All Oil produced from the Subject Interests and delivered at the
Delivery Point shall satisfy the quality standards and the
specifications of Koch Pipeline Company, L.P. and all other applicable
carriers. Working Interest Owner agrees that Production Payment Owner
or its affiliates may conduct any sampling and testing of the quality
of such Oil from the Subject Interests.
SCHEDULE II
TO
PURCHASE AGREEMENT FOR VOLUMETRIC PRODUCTION
Exceptions to Representations
1. Phillips Petroleum Company, a Delaware corporation, has a preferential
purchase right in effect relating to the Subject Interests.
SCHEDULE III
TO
PURCHASE AGREEMENT FOR VOLUMETRIC PRODUCTION
Plan of Development
In August 1997, GeoResources initiated production from a new horizontal
well named the Balantyne-State/Steinhaus H1 (BSS H1) located in the Wayne
Field of Bottineau County, North Dakota.
The BSS H1 and 3 other producing vertical wells make up a 320 acre
production unit spaced and pooled such that all ownership is common in all the
wells and all production is treated at one common tank battery. Average daily
production from this 4-well property (the BSS Property) for October 1997 was
224 BOPD. GeoResources' plan is to commit the BSS Property to a 75 BOPD
volume production payment for a term of one year (27,375 bbls) to raise
capital to drill a 4th horizontal well on our Oscar Fossum lease located in
the same field. Our working interest in that lease is 67% and our share of
drilling and completion costs is AFE'd at about $400,000. GeoResources has
contracted the Oscar Fossum H4 well to Caza Drilling Company and it is
scheduled to be drilled by Caza Rig 43 as soon as that rig finishes 2 wells
scheduled ahead of ours. Our expectation is that the rig will be available
for us about the end of November 1997.
Move in and rig up will only take 2 days so a reasonable expectation
for spudding this well would be Monday, December 15, 1997. Drilling should
take about 21 days. After a short break for the Christmas and New Year's
holidays, a completion would begin about Monday, January 19th. The completion
and setting of a pumping unit should be finished in one week. The flowline
connecting the Fossum H4 to the central battery has already been laid in the
ground so that work would not have to be done in winter weather conditions.
Production from the Oscar Fossum H4 should begin January 31, 1998.
CRUDE OIL PURCHASE AGREEMENT
Purchased from: Date: December 2, 1997
GeoResources, Inc. Results of Discussions
1407 West Dakota Parkway, Suite 1-B between Blaine Parrott and
Williston, ND 58801 Jeff Vickers
Koch Contract # 36123
Gentlemen,
This document, when executed by the parties, will constitute an Agreement
between GeoResources, Inc. ("GeoResources") and Koch Oil Company ("Koch"),
covering the purchase and sale of crude oil and/or condensate under the
following terms and conditions:
1. Definitions. When used in this Agreement, the terms listed below have
the following meanings:
"Affiliate" - means a corporation controlling, controlled by or under
common control with either Koch or GeoResources, as the case may be.
"Agreement" - means this contract and any exhibits or amendments.
"Business Day" - means any day in which the offices of Koch and
GeoResources are both open for business.
"VPP Agreement"- means that certain agreement executed contemporaneously
herewith between Koch Producer Services Inc. and GeoResources for the
funding of the properties listed on Exhibit "A".
"Crude Oil" - means crude oil and/or condensate.
2. Term: The term of this Agreement shall begin effective at 7:00 a.m. on
December 1, 1997, and shall end at 7:00 a.m. on November 30, 2004.
(a) From December 1, 1997 through November 30, 1998, and continuing on
a month to month basis thereafter until terminated by Koch or GeoResources
on thirty (30) days advance written notice to the other (hereinafter, the
"Initial Term"), Koch agrees to buy, and GeoResources agrees to sell, all
Crude Oil produced by GeoResources from the properties listed on Exhibit
"A" on the terms and conditions more fully set out in paragraphs
subsequent to this Paragraph 2 of this Agreement. The foregoing is
subject to the pre-existing rights of Phillips Petroleum Company to have
call on the referenced Crude Oil.
(b) Upon the conclusion of the Initial Term as provided for in Paragraph
2(a) above and until the end of the term of this Agreement, GeoResources
agrees to sell to Koch all Crude Oil produced by GeoResources from the
properties listed on Exhibit "A" at a price and on such terms as are
mutually agreeable between the parties. Should the parties not be able to
mutually agree to a price and/or term for the purchase and sale of Crude
Oil produced by GeoResources from the properties listed on Exhibit "A",
GeoResources shall be entitled to receive a bona fide written offer from
an unaffiliated third party to purchase such Crude Oil on an outright
basis. The bona fide written offer must be made for the outright
purchase of the Crude Oil production, and any offers for transportation,
buy/sell, exchange, or similar types of agreements will not be considered
a comparable bona fide offer. Upon receipt of such a bona fide written
offer from an unaffiliated third party to purchase Crude Oil production
from the properties listed on Exhibit "A" that GeoResources is willing
to accept, GeoResources agrees to immediately (i) forward to Koch the
written offer from the third party setting forth the terms and provisions
of such offer including the basis for determination of the price; and
(ii) forward to Koch, at the same time as the writing required in (i)
above is sent, copies of all information supplied by and between
GeoResources and such third party. The information and materials
addressed in (i) and (ii) above shall hereinafter collectively be
referred to as the "Notification". Upon Koch's receipt of the
Notification, Koch shall then have an optional right, for a period of
ten (10) Business Days thereafter, to either match the offer and purchase
the Crude Oil on the same terms and conditions and for the same volume
as offered by such third party, or make a better offer than that
submitted by such third party. In the event Koch elects not to match
or better the third party's written offer within the required time period,
GeoResources shall have the right, which must be exercised within ten (10)
Business Days following the expiration of Koch's ten (10) Business Day
period, to enter into an agreement with the third party that made the
offer containing the same terms and provisions that were included in the
Notification; provided, however, that GeoResources may not enter into an
agreement with any third party for a term longer than twelve (12) months,
after which term Koch may again exercise its rights as stated in this
Paragraph 2(b). If GeoResources does not enter into an agreement with
a third party within the ten (10) Business Day period following the
expiration of Koch's ten (10) Business Day period to match or make a
better offer, or if the third party purchase agreement fails to contain
the same terms and provisions as contained in the Notification, or at
the end of any contract term with a third party, GeoResources shall be
required to send a new Notification to Koch and allow Koch the right to
match or make a better offer than the offer submitted by such third
party; all in the manner specified above.
3. Quantity: During the Initial Term of this Agreement, Koch shall
purchase and GeoResources shall sell all Crude Oil produced by
GeoResources from the properties listed on Exhibit "A".
4. Price: For each barrel of Crude Oil purchased by Koch from GeoResources
during the Initial Term, Koch shall pay a price equal to Koch's Posting
for North Dakota Sour Crude Oil, gravity delivered, plus $2.75. For
purpose of pricing, all volumes purchased and sold hereunder will be
assumed to have been delivered in Equal Daily Quantities (EDQ).
5. Crude Type: The crude oil purchased by Koch at the lease shall be
various domestic lease crudes.
6. Delivery/Title Risk of Loss: GeoResources shall deliver all Crude Oil
purchased by Koch hereunder from tankage and/or through mutually
acceptable meters located at the facilities of GeoResources on the
properties listed on Exhibit "A." Title and risk of loss shall pass
from GeoResources to Koch as the crude oil passes the outlet flange of
the lease tankage or meter.
7. Quality: All crude oil produced from each lease and purchased hereunder
shall meet the specifications of all applicable carriers.
8. Payment: Payment for the Crude Oil shall be made not later than twenty
days after the end of the month in which delivery of Crude Oil was made.
Koch shall hold the basic division order for the purchase of Crude Oil
hereunder. All payments shall be made via wire net out in accordance
with that certain Net Out Agreement between GeoResources, Inc. and Koch
Oil Company dated August 21, 1992.
9. Miscellaneous Provisions.
a. Amendments and Waiver. No amendment or waiver of any provision
of this Agreement, nor consent to any departure by either party
therefrom, shall be effective unless the same is in writing and
signed by Koch and GeoResources, and such waiver or consent shall
be effective only in the specific instance and for the specified
purpose for which given.
b. Assignment. Either party may assign this Agreement in whole or
in part to an Affiliate or may cause any or all of its obligations
to be performed by an Affiliate. Neither party will assign its
rights or delegate its duties under this Agreement in whole or in
part to a non-Affiliate, without the prior written consent of the
other party, which consent will not be unreasonably withheld.
GeoResources' rights and obligations stated under this Agreement
shall run with the properties listed on Exhibit "A" and shall be
binding on the successors and assigns of GeoResources.
c. Notice. Any notices required or desired to be given hereunder
shall be in writing and shall be addressed as follows:
If to Koch:
Koch Oil Company
4111 E. 37th St. North, P.O. Box 2256
Wichita, Kansas 67201
Attn: President
Facsimile: (316) 828-8245
If to GeoResources:
GeoResources, Inc.
1407 West Dakota Parkway, Suite 1-B
Williston, ND 58801
Attn: Jeff Vickers, President
Facsimile: 701-572-0277
Notices provided hereunder shall be deemed to have been received
when sent, if provided by telefax or hand, or when actually
received, if provided by first class mail. In the event that
any such notice is received after 4:00 PM local time on a Business
Day or is received on a non-Business Day, delivery shall be deemed
to have been received on the next Business Day.
d. No Third Party Beneficiaries. Nothing in the Agreement is intended
to inure to the benefit of any third party, and this Agreement
shall not create any third party beneficiaries.
e. Choice of Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Kansas, without
reference to conflict of laws provisions that may direct the
application of laws other than the state of Kansas.
f. Construction. This Agreement has been negotiated and prepared at
the joint request, direction and construction of the parties, at
arms length, with the advice and participation of counsel for each
party, and will be interpreted in accordance with its terms without
favor to any party.
g. Severability. If any provision or any portion of any provision of
this Agreement or the application of any such provision or any
portion thereof to any person or circumstance, is held invalid or
unenforceable, the remaining portion of such provision and the
remaining provisions shall remain in full force and effect.
h. Entire Agreement. This Agreement, its exhibits and Koch's attached
General Provisions dated 8/96 constitute the entire agreement
between the parties with respect to the purchase of Crude Oil
from GeoResources. All prior agreements with respect to the
purchase of Crude Oil from the properties listed on Exhibit "A"
are hereby superseded and replaced. Where the General Provisions
are inconsistent with the specific provisions of this Agreement,
this Agreement shall control.
IN WITNESS WHEREOF, the parties hereto have caused this Crude Oil Purchase
Agreement to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
KOCH OIL COMPANY
By: __/s/ James B. Urban_____
Printed Name: James B. Urban
Title: Vice President,
Koch Oil Company
Date: 12/8/97
GEORESOURCES, INC.
By: __/s/ J. P. Vickers______
Printed Name: J. P. Vickers
Title: President
Date: 12/3/97
Tax I.D. Number __84-0505444___
EXHIBIT "A"
LSE NBR PROPERTY NAME COUNTY ST
0043782 Ballantyne-State 3 Bottineau ND
0043782 William Steinhaus 2 Bottineau ND
0043782 Ballantyne-State 1 Bottineau ND
0043782 Ballantyne-State/Steinhaus H1 Bottineau ND
PURCHASE AGREEMENT
GENERAL PROVISIONS
1. MEASUREMENT AND TESTS: All measurements hereunder shall represent one
hundred percent (100%) volume, consisting of United States barrels of forty-
two (42) gallons, the quantity and gravity of which will be adjusted to sixty
degrees (60) Fahrenheit temperature. Procedures for measuring and testing,
except for delivery through positive displacement type meters shall be
computed in accordance with the latest ASTM published methods then in effect.
Procedures for such meter type deliveries shall be in accordance with the
latest ASME-API (Petroleum PD Meter Code) published methods then in effect.
The crude oil and/or condensate delivered hereunder shall be merchantable and
acceptable to the carriers involved but not to exceed one percent (1%) BS&W
and full deduction shall be made for all BS&W content according to the ASTM
Standard Method then in effect. Should either party hereto fail to have a
representative present during such measuring and testing, the measurement and
tests of the other party shall be accepted.
2. PAYMENT: Unless specifically stated otherwise on the reverse side of this
agreement, Buyer agrees to make payment to Seller for the crude oil and/or
condensate purchased hereunder not later than the 20th day of the month
following the month of delivery. If payment is made by wire transfer and the
20th day of the month falls on a Saturday or a New York Bank Holiday other
than a Monday, payment shall be due on the immediately preceding New York
Banking Day. If payment is made by wire transfer and the 20th day of the
month falls on a Sunday or a Monday New York Bank Holiday, payment shall be
due on the next succeeding New York Banking Day. If payment is made by check
and the 20th day of the month falls on a Saturday, the check will be mailed
on that Saturday. If payment is made by check and the 20th day falls on a
Sunday, the check will not be mailed until the following Monday, unless that
Monday is a New York Bank Holiday, in which event the check will be mailed on
the next succeeding New York Banking Day.
Should the financial responsibility of Buyer at any time become impaired,
unsatisfactory, or unacceptable to Seller, or if sales to Buyer should exceed
approved credit lines, then Buyer shall secure and deliver to Seller such
advance payments or other security, including in appropriate instances an
acceptable letter of credit, as shall be required by Seller, and deliveries
of oil and/or condensate hereunder may be withheld until such security is
received. If such security is not received within the time specified by
Seller, then Seller shall have the right to cancel this agreement.
3. WARRANTY: The Seller warrants title to all crude oil and/or condensate
sold and delivered hereunder and warrants that same shall be free from all
royalties, liens, and encumbrances, and that all taxes applicable prior to
delivery, including but not limited to any production, extraction or other
state, federal, or local lease level tax as well as any taxes for which the
"First Purchaser" is responsible for paying or collecting, have been or will
be paid. There are no other representations, guarantees, or warranties,
expressed or implied, including particularly any implied warranty of fitness
for a particular purpose, or otherwise, which extend beyond the descriptions
set forth explicitly in this agreement. The parties agree that this
transaction is in the ordinary course of their respective business activities.
4. PROCEEDS: The proceeds of the crude oil sold hereunder, after deducting
any taxes imposed on said oil which are required to be deducted by Buyer and
any trucking or handling charges or other deductions agreed upon by Buyer and
Seller, shall be paid to Seller monthly for oil received and purchased during
the preceding month by Buyer. In the event of any adverse claim, assertion
of lien, or any dispute concerning title to the property described in this
agreement or to the mineral proceeds from such property, Buyer may withhold
payments for the oil until the claim, lien assertion, or dispute is settled,
without liability for interest unless otherwise required by applicable
statute. If requested, Seller agrees to furnish evidence of title
satisfactory to Buyer. Should Buyer resell the oil to another purchaser who
accepts delivery at the point at which Buyer takes title, settlements to
Seller may be based on the grades, measurements, volume computations, and/or
deductions of that purchaser.
5. INDEMNITY BY SELLER: Seller agrees to indemnify and defend Buyer, its
agents, successors, assigns, and related entities, against any and all claims,
liabilities, losses damages, costs, expenses, and attorneys' fees relating to
or otherwise arising from the oil purchases under this agreement. Seller
further agrees to make settlement with all parties in interest, including
settlement with the proper authorities for taxes, interest, and penalties, if
any, due upon said oil when such taxes, interest, and penalties are not
deducted as authorized in Paragraph Four above. Buyer is required to withhold
31% in Federal Income Tax from payments to owners who have not provided Buyer
with a taxpayer identification number/social security number. TO AVOID THE
31% WITHHOLDING, SELLER SHALL PROVIDE ITS TAX IDENTIFICATION NUMBER/SOCIAL
SECURITY NUMBER IN THE SPACE PROVIDED ON THE SPECIAL PROVISIONS TO WHICH THESE
GENERAL PROVISIONS ARE ATTACHED.
6. RULES AND REGULATIONS: All of the terms and provisions of this agreement
shall be subject to the applicable orders, rules and regulations (hereinafter
generically referred to as "Regulations") of all governmental authorities
having or purporting to have jurisdiction in the premises. If at any time or
from time to time such regulations should be amended or should new regulations
be adopted and the effect of such amended or new regulation (a) is not covered
by any other provision of this agreement and (b) has an adverse economic
effect upon either party hereto or its suppliers or customers, the party
affected shall have the option to request renegotiation of the prices and
other pertinent terms provided for in this agreement. Said option may be
exercised by such party at any time after such amended or new regulation is
promulgated by giving written notice of the desire to renegotiate prior to
the time of delivery of the oil, such notice to contain the new prices and
terms desired by the affected party. If the parties do not agree upon new
prices and terms satisfactory to both within (30) days after such notice is
given, the affected party shall have the right to terminate this agreement at
the end of said thirty (30) day period.
7. FORCE MAJEURE: Either party hereto shall be relieved from liability for
failure to deliver or receive crude oil and/or condensate hereunder for the
time and to the extent such failure is occasioned by war, fire, explosion,
riot, strike, or other industrial disturbances or concerted action of workmen,
acts of God, governmental regulations, disruption or breakdown of production
or transportation facilities, delays of pipeline carrier in receiving and
delivering crude oil and/or condensate tendered, by any decline in field
production, or by any other cause, whether similar or not to those heretofore
enumerated, reasonably beyond the control of such party.
8. EQUAL DAILY DELIVERIES: It is agreed that Buyer will pay for said crude
oil and/or condensate purchased hereunder on the basis of the posted price in
effect each day for the average number of barrels delivered each day during
each month hereunder. Such average shall be determined by dividing the total
number of barrels delivered hereunder during each month by the total number of
days in such month. The parties agree, conclusively, that delivery shall be
presumed to be made in equal daily quantities on the respective dates as
determined hereinabove and not on any other date.
9. CLAIMS: All other claims as to shortage in quantity, to defects in
quality, or any others, except for demurrage, shall be made by written notice
to the other party within sixty (60) days after the delivery in question;
claims for demurrage shall be made within one (1) year after the delivery in
question; otherwise, any such claims shall be deemed to have been waived. No
claims whatever shall be made under this agreement for special, indirect, or
consequential damages.
10. ASSIGNMENT: Neither party shall assign this agreement or any rights
hereunder without first obtaining the written consent of the other party
hereto.
11. SAFETY: Each party agrees that its agents and employees will comply with
all safety regulations of the other when such agents or employees are upon the
premises of the other in connection with the performance of this contract.
12. BUSINESS PRACTICES: Each party hereto agrees to comply with all laws and
regulations applicable to activities carried out in the name of or on the
behalf of the other party under provisions of this agreement.
Each party hereto agrees that all financial settlements, billings and reports
rendered to the other party as provided for in this agreement will, to the
best of its knowledge, reflect properly the facts about all activities and
transactions related to this agreement.
Each party agrees to notify the other party promptly upon discovery of any
instance where the notifying party fails to comply with either provision above
or whose conduct by the notified party is considered, by the notifying party,
to be in breach of this agreement.
13. ADDITIONAL TERMS: No waiver by either party hereto of a breach of an
obligation owed hereunder by the other party shall be construed as a waiver of
any other breach, whether of the same or a different nature.
Any provision hereof which is legally unenforceable shall be ineffective only
to the extent of such unenforceability without thereby invalidating the
remaining provisions hereof or affecting the validity of enforceability of
this agreement as a whole.
This agreement contains the entire agreement between the Seller and Buyer with
respect to the subject matter hereof, and there are no other promises,
representations, or warranties affecting it.
The specific provisions contained in this agreement govern the general
provisions of this agreement in the event of any conflict between the two.
This agreement shall not be modified or amended except by written instrument
duly executed by officers or other duly authorized representatives of the
respective parties.
CRUDE OIL PURCHASE/EXCHANGE AGREEMENT
Purchase from/Exchanged with: Date: December 2, 1997
GeoResources, Inc. Results of Discussions
1407 West Dakota Parkway, Suite 1-B between Blaine Parrott and
Williston, ND 58801 Jeff Vickers
Koch Contracts # 36123
and # 13692
Gentlemen,
This document, when executed by the parties, will constitute an Agreement
between GeoResources, Inc. ("GeoResources") and Koch Oil Company ("Koch"),
covering the purchase and sale of crude oil and/or condensate under the
following terms and conditions:
1. Definitions. When used in this Agreement, the terms listed below have
the following meanings:
"Affiliate" - means a corporation controlling, controlled by or under
common control with either Koch or GeoResources, as the case may be.
"Agreement" - means this contract and any exhibits or amendments.
"Business Day" - means any day in which the offices of Koch and
GeoResources are both open for business.
"VPP Agreement"- means that certain agreement executed contemporaneously
herewith between Koch Producer Services Inc. and GeoResources for the
funding of certain leases in Bottineau County, North Dakota.
"Crude Oil" - means crude oil and/or condensate.
2. Term: The term of this Agreement shall begin effective at 7:00 a.m. on
December 1, 1997, and shall end at 7:00 a.m. on November 30 , 2000.
(a) From December 1, 1997 through November 30, 1998, and continuing on
a month to month basis thereafter until terminated by Koch or
GeoResources on thirty (30) days advance written notice to the other
(hereinafter, the "Initial Term"), Koch agrees to purchase and
GeoResources agrees to sell all Crude Oil produced by GeoResources from
the properties listed on Exhibit "A." During the Initial Term, Koch
and GeoResources further agree to exchange all Crude Oil produced by
GeoResources from the properties listed on Exhibit "B." The terms and
conditions of such purchase and exchange transactions are more fully
set out in paragraphs subsequent to this Paragraph 2 of this Agreement.
(b) Upon the conclusion of the Initial Term as provided for in
Paragraph 2(a) above and until the end of the term of this Agreement,
GeoResources agrees to sell to Koch all Crude Oil produced by
GeoResources from the properties listed on Exhibits "A" and "B,"
(collectively, in this Paragraph referred to as the "Subject Crude
Oil"), at a price and on such terms as are mutually agreeable between
the parties. Should the parties not be able to mutually agree to a
price and/or term for the purchase and sale of the Subject Crude Oil,
GeoResources shall be entitled to receive a bona fide written offer
from an unaffiliated third party to purchase the Subject Crude Oil.
Upon receipt of such a bona-fide written offer from an unaffiliated
third party to purchase the Subject Crude Oil that GeoResources is
willing to accept, GeoResources agrees to immediately (i) forward to
Koch the written offer from the third party setting forth the terms and
provisions of such offer including the basis for determination of the
price; and (ii) forward to Koch, at the same time as the writing
required in (i) above is sent, copies of all information supplied by
and between GeoResources and such third party. The information and
materials addressed in (i) and (ii) above shall hereinafter collectively
be referred to as the "Notification." Upon Koch's receipt of the
Notification, Koch shall then have an optional right, for a period of
ten (10) Business Days thereafter, to either match the offer and
purchase the Subject Crude Oil on the same terms and conditions and for
the same volume as offered by such third party, or make a better offer
than that submitted by such third party. In the event Koch elects not
to match or better the third party's written offer within the required
time period, GeoResources shall have the right, which must be exercised
within ten (10) Business Days following the expiration of Koch's ten
(10) Business Day period, to enter into an agreement with the third party
that made the offer containing the same terms and provisions that were
included in the Notification; provided, however, that GeoResources may
not enter into an agreement with any third party for a term longer than
twelve (12) months, after which term Koch may again exercise its rights
as stated in this Paragraph 2(b). If GeoResources does not enter into an
agreement with a third party within the ten (10) Business Day period
following the expiration of Koch's ten (10) Business Day period to match
or make a better offer, or if the third party purchase agreement fails to
contain the same terms and provisions as contained in the Notification,
or at the end of any contract term with a third party, GeoResources shall
be required to send a new Notification to Koch and allow Koch the right
to match or make a better offer than the offer submitted by such third
party; all in the manner specified above.
3. Quantity: During the Initial Term of this Agreement, Koch agrees to
purchase and GeoResources agrees to sell all Crude Oil produced by
GeoResources from the properties listed on Exhibit "A." During the
Initial Term, Koch and GeoResources further agree to exchange all Crude
Oil produced by GeoResources from the properties listed on Exhibit "B."
4. Price; Delivery; Title; Risk of Loss
a) Properties Listed on Exhibit A: Koch Contract Number 36123
i) Koch's Receipt: During the Initial Term, GeoResources shall
deliver, or cause to be delivered, each barrel of Crude Oil
produced from properties listed on Exhibit "A" from tankage
and/or through mutually acceptable meters located at the
facilities of GeoResources listed on Exhibit "A." Title and
risk of loss shall pass from GeoResources to Koch as the Crude
Oil passes the outlet flange of the lease tankage or meter.
During the Initial Term, Koch shall pay GeoResources for each
barrel of Crude Oil produced from properties listed on Exhibit
"A" a price equal to Koch's posting for North Dakota Sour,
gravity delivered, plus $2.75 per barrel. For purposes of
pricing, all volumes will be assumed to have been delivered in
Equal Daily Quantities (EDQ).
b) Properties Listed on Exhibit B: Koch Exchange Number 13692
i) Koch's Receipt: During the Initial Term, GeoResources shall
deliver, or cause to be delivered, each barrel of Crude Oil
produced from the properties listed on Exhibit "B" from tankage
and/or through mutually acceptable meters located at the
facilities of GeoResources listed on Exhibit "B." Title and
risk of loss shall pass from GeoResources to Koch as the Crude
Oil passes the outlet flange of the lease tankage or meter.
During the Initial Term, Koch shall pay GeoResources for each
barrel of Crude Oil produced from properties listed on Exhibit
"B" a price equal to Koch's posting for North Dakota Sour,
gravity delivered. For purposes of pricing, all volumes will
be assumed to have been delivered in Equal Daily Quantities
(EDQ).
ii) GeoResources' Receipt: During the Initial Term, Koch shall
deliver, or cause to be delivered to GeoResources at Arco
Pipeline Company's crude oil terminal in Cushing, Oklahoma, a
volume of Arco Common Stream Domestic Sweet Crude Oil equal to
that which is delivered by GeoResources pursuant to Paragraph
4(b)(i). Title and risk of loss shall pass from Koch to
GeoResources within the facilities of Arco Pipeline at Cushing,
Oklahoma. During the Initial Term, GeoResources shall pay Koch
for each barrel of Crude Oil delivered pursuant to this
Paragraph 4(b)(ii) a price equal to Koch's posting for West
Texas/New Mexico Intermediate, deemed 40 degrees API gravity,
less $0.40 per barrel. For purposes of pricing, all volumes
will be assumed to have been delivered in Equal Daily
Quantities (EDQ).
5. Crude Type: The crude oil purchased by Koch at the lease shall be various
domestic lease crudes.
6. Quality: All crude oil produced from each lease and purchased hereunder
shall meet the specifications of all applicable carriers.
7. Imbalances: The transaction contemplated pursuant to Paragraph 4(b) of
this Agreement is an exchange transaction wherein Koch will deliver to
GeoResources at the designated point of delivery a volume of Crude Oil
equal to that which GeoResources delivers to Koch pursuant to Paragraph
4(b)(i). Koch shall be obligated to deliver the volume of crude oil
scheduled pursuant to Paragraph 4(b)(ii) if GeoResources performs its
delivery scheduled pursuant to Paragraph 4(b)(i). Koch and GeoResources
agree that they shall maintain the exchange deliveries in balance on a
monthly basis as much as is practicable to avoid any imbalance.
In the event a imbalance arises during the term of this Agreement as a
result of one party delivering more than the other party, either party
may notify the other party, such notification to be in writing, as to the
volume of the imbalance. Subsequent deliveries by either party under this
Agreement after such notice shall be applied first to the imbalance and
then to any further delivery obligations.
8. Payment: Payment for the Crude Oil shall be made not later than twenty
days after the end of the month in which delivery of Crude Oil was made.
All payments shall be made via wire net out in accordance with that
certain Net Out Agreement between GeoResources, Inc. and Koch Oil Company
dated August 21, 1992.
Koch shall hold the basic division order for the purchase of Crude Oil
produced from leases listed on Exhibit A (Koch Contract #36123).
Payment for Crude Oil produced from leases listed on Exhibit B (Koch
Contract #13692) shall be made by Koch to GeoResources on a 100%
Indemnifying Division Order basis including taxes per Exhibit "C."
GeoResources assumes responsibility to account and make payment of
proceeds to interest owners, obtain, execute, and deliver division
orders, file MMS Form 2014s, if applicable, and perform all other
related obligations under this Agreement.
9. Miscellaneous Provisions.
a. Amendments and Waiver. No amendment or waiver of any provision of
this Agreement, nor consent to any departure by either party
therefrom, shall be effective unless the same is in writing and
signed by Koch and GeoResources, and such waiver or consent shall
be effective only in the specific instance and for the specified
purpose for which given.
b. Assignment. Either party may assign this Agreement in whole or in
part to an Affiliate or may cause any or all of its obligations to
be performed by an Affiliate. Neither party will assign its rights
or delegate its duties under this Agreement in whole or in part to
a non-Affiliate, without the prior written consent of the other
party, which consent will not be unreasonably withheld.
GeoResources's rights and obligations stated under this Agreement
shall run with the properties listed on Exhibits "A"and "B" and
shall be binding on the successors and assigns of GeoResources.
c. Notice. Any notices required or desired to be given hereunder shall
be in writing and shall be addressed as follows:
If to Koch:
Koch Oil Company
4111 E. 27th St. North
Wichita, Kansas 67220
Attn: President
Facsimile: (316) 828-8245
If to GeoResources:
GeoResources, Inc.
1407 West Dakota Parkway, Suite 1-B
Williston, ND 58801
Attn: Jeff Vickers, President
Facsimile: 701-572-0277
Notices provided hereunder shall be deemed to have been received
when sent, if provided by telefax or hand, or when actually
received, if provided by first class mail. In the event that any
such notice is received after 4:00 PM local time on a Business Day
or is received on a non-Business Day, delivery shall be deemed to
have been received on the next Business Day.
d. No Third Party Beneficiaries. Nothing in the Agreement is intended
to inure to the benefit of any third party, and this Agreement shall
not create any third party beneficiaries.
e. Choice of Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Kansas, without
reference to conflict of laws provisions that may direct the
application of laws other than the state of Kansas.
f. Construction. This Agreement has been negotiated and prepared at the
joint request, direction and construction of the parties, at arms
length, with the advice and participation of counsel for each party,
and will be interpreted in accordance with its terms without favor to
any party.
g. Severability. If any provision or any portion of any provision of
this Agreement or the application of any such provision or any
portion thereof to any person or circumstance, is held invalid or
unenforceable, the remaining portion of such provision and the
remaining provisions shall remain in full force and effect.
h. Entire Agreement. This Agreement, its exhibits and Koch's attached
General Provisions dated 8/96 constitute the entire agreement between
the parties with respect to the purchase of Crude Oil from
GeoResources. All prior agreements with respect to the purchase of
Crude Oil from the leases listed on Exhibits "A" and "B" are hereby
superseded and replaced. Where the General Provisions are
inconsistent with the specific provisions of this Agreement, this
Agreement shall control.
IN WITNESS WHEREOF, the parties hereto have caused this Crude Oil
Purchase/Exchange Agreement to be executed by their respective officers
thereunto duly authorized, as of the date first above written.
KOCH OIL COMPANY
By: __/s/ James B. Urban_____
Printed Name: James B. Urban
Title: Vice President,
Koch Oil Company
Date: 12/8/97
GEORESOURCES, INC.
By: __/s/ J. P. Vickers______
Printed Name: J. P. Vickers
Title: President
Date: 12/3/97
Tax I.D. Number __84-0505444___
EXHIBIT "A"
Koch Exchange Contract Number 36123
LSE NBR PROPERTY NAME COUNTY ST
20854 Dagmar Fossum Bottineau ND
59284 Oscar Fossum #4 Bottineau ND
59285 Oscar Fossum Bottineau ND
EXHIBIT "B"
Koch Exchange Contract Number 13692
LSE NBR PROPERTY NAME COUNTY ST
54270 PEOC McKenzie ND
66416 Mott Renville ND
10300 Carroll Brandt Bottineau ND
34863 Anderson Bottineau ND
816 Carroll Aitken Renville ND
1930 Anderson et al Bottineau ND
24840 Hultgren Bottineau ND
31289 Billehus Bottineau ND
39755 Lawrence Hanson Bottineau ND
43982 Arthur Hetland McHenry ND
43992 Stella Rice Bottineau ND
44005 Hanson State Bottineau ND
44012 W&M Peterson Bottineau ND
44014 Witteman Bottineau ND
44019 USA Johnson Bottineau ND
44025 John Waddle Bottineau ND
44051 Obert Linstad Bottineau ND
48317 O&V Johnson Bottineau ND
48318 V&F Johnson Bottineau ND
48319 Lillegard-Johnson Bottineau ND
48904 Juve Bottineau ND
51954 Grann County Bottineau ND
55257 Grann Bottineau ND
56010 Johnson-Lillegard Bottineau ND
56074 Harold Lindstrom Bottineau ND
59273 Romos Bottineau ND
59274 Welstad McHenry ND
68115 Walter G. Nelson Bottineau ND
68927 Howard Nordmark Bottineau ND
70063 Waddle Olson Bottineau ND
71965 Elof G. Pearson Bottineau ND
77240 Rice Bottineau ND
88608 Sveen Bottineau ND
90472 Tolstad Bottineau ND
1859 Anton Anderson Bottineau ND
EXHIBIT "C"
[Koch Oil Company's INDEMNIFYING DIVISION ORDER dated 05/14/92,
with revisions of 2/21/95]
MEMORANDUM
OF
AGREEMENT RELATING TO PURCHASE OF CRUDE OIL
STATE OF NORTH DAKOTA }
} ALL PERSONS BY THESE PRESENTS:
COUNTY OF BOTTINEAU }
THAT, as of the effective date hereof, GEORESOURCES, INC., a Colorado
corporation ("Seller"), and KOCH OIL COMPANY ("Buyer"), have entered into
certain agreements relating to a preferential right granted to Koch Oil by
Seller to purchase crude oil produced by Seller (referred to herein as the
"Purchase Agreement"), with respect to Properties described on Exhibit "A"
attached hereto.
1. Definitions. Unless otherwise defined herein or the context
otherwise requires, capitalized terms used in this Memorandum have the
meanings provided in the Purchase Agreement.
2. Preferential Right to Purchase. The Purchase Agreement provide
that, on and subject to the terms, provisions and conditions of the Purchase
Agreement, Seller has granted to Buyer a preferential right to purchase the
hydrocarbons produced from the Properties from the date hereof for the period
extending to the later of (a) seven (7) years from the date hereof and (b) the
term of any note or other financing instrument existing between Seller and
Buyer's affiliate, Koch Producer Services, Inc.
3. Controlling Document. If any of the terms set forth in this
Memorandum conflict with any of the terms set forth in the Purchase Agreement,
the terms of the Purchase Agreement shall control and supersede any terms of
this Memorandum. It is the intent of this Memorandum to give notice to third
parties that Buyer and Seller have entered into the Purchase Agreement
relating to the Properties. It is not the purpose of this Memorandum to
amend, modify, eliminate, or add to the provisions of such Purchase Agreement.
4. Successors and Assigns. The right and obligations of the parties
to the Purchase Agreement are binding on, and inure to the benefit of, the
respective permitted successors and assigns of the parties.
5. Automatic Expiration of Notice. This Memorandum, and the notice
of the Purchase Agreements provided hereby, shall immediately and
automatically expire and be without further force or affect on December 31,
2010, unless a fully executed original of an agreement extending the notice
provided hereby, executed by both Seller and Buyer, shall be recorded in the
Official Public Records of Real Property of Bottineau, North Dakota, on or
before such date.
IN WITNESS WHEREOF, Seller and Buyer have executed this Memorandum to
be effective as of the 1st day of December, 1997.
SELLER:
GEORESOURCES, INC.
By: /s/ J. P. Vickers
Name: J. P. Vickers
Title: President
ATTESTING WITNESSES TO
SIGNATURE OF SELLER:
/s/ Cathy Kruse
/s/ Connie Hval
BUYER:
KOCH OIL COMPANY
By: /s/ James B. Urban
Name: James B. Urban
Title: Vice President,
Koch Oil Company
ATTESTING WITNESSES TO
SIGNATURE OF BUYER:
/s/ Michael A. Dooms
/s/
ACKNOWLEDGMENTS
STATE OF NORTH DAKOTA )
) SS.
COUNTY OF WILLIAMS )
BE IT REMEMBERED that I, Donna C. Hanson, a Notary Public duly
qualified, commissioned, sworn and acting in and for the County and State
aforesaid, hereby certify that, on this 3rd day of December, 1997, there
appeared before me J. P. Vickers, the President of GeoResources, Inc., a
Colorado corporation, whose address is 1407 West Dakota Parkway, Suite 1-B,
Williston, ND 58801.
TEXAS This instrument was acknowledged before me on this day
by each such person as the designated officer of the
company set opposite his name (or a Trustee, as the
case may be) on behalf of said company set opposite
his name (or of himself as Trustee, as the case may
be).
NORTH DAKOTA Before me personally appeared each such person, each
of whom is known to me to be the officer of the
corporation or association described in and that
executed this instrument, and acknowledged to me that
such corporation or association executed the same.
Witness my hand and official seal.
/s/ Donna C. Hanson
Notary Public
Residing at Williston, ND
My commission expires:
September 5, 2002
ACKNOWLEDGMENTS
State of Kansas )
) SS.
County of Sedgwick )
This instrument was acknowledged before me on December 5, 1997 by James
B. Urban, Vice President of KOCH OIL COMPANY, a division of Koch Industries,
Inc., a Kansas Corporation, on behalf of the corporation.
Witness my hand and official seal.
/s/ Michael A. Dooms
Notary Public
My Commission expires:
2/7/2001
Recording Requested by, and
after Recordation Return to:
MAYER, BROWN & PLATT
700 Louisiana Street
Houston, Texas 77002
Attn: Francis R. Bradley, III
Exhibit A - Description of Properties
Exhibit A
Description of Properties
EXHIBIT "A"
LSE NBR PROPERTY NAME COUNTY ST
0043782 Ballantyne-State 3 Bottineau ND
0043782 William Steinhaus 2 Bottineau ND
0043782 Ballantyne-State 1 Bottineau ND
0043782 Ballantyne-State/Steinhaus H1 Bottineau ND
EXHIBIT "A"
Attached to and made a part of the
Between GeoResources, Inc. and Koch Producer Services, Inc.
STATE OF NORTH DAKOTA COUNTY OF BOTTINEAU
Lease Schedule
LESSOR State Land Department, State of North Dakota
LESSEE Leonard F. Ward and Almer Swanson
DATE 5/29/49
DESCRIPTION Township 162 North, Range 82 West
Section 25: NE1/4 and other lands not
subject to this agreement
ACRES 160
BOOK Z
PAGE 475
LESSOR William M. Steinhaus (aka W. M. Steinhaus)
and Louise Steinhaus, husband and wife
LESSEE Placid Oil Company
DATE 8/23/73
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2,
and other lands not subject
to this agreement
ACRES 157.31
BOOK 176
PAGE 219
LESSOR Evelyn L. Lorius (fka Evelyn L. Nielsen)
and Fred A. Lorius, wife and husband
LESSEE GeoResources, Inc.
DATE 3/14/75
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2,
and other lands not subject
to this agreement
ACRES 157.31
BOOK 186
PAGE 21
LESSOR R. O. Gothenquist and
Ruth M. Gothenquist, husband and wife
LESSEE GeoResources, Inc.
DATE 3/14/75
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2,
and other lands not subject
to this agreement
ACRES 157.31
BOOK 186
PAGE 41
LESSOR Howard Spoklie
LESSEE GeoResources, Inc.
DATE 3/14/75
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2,
and other lands not subject
to this agreement
ACRES 157.31
BOOK 186
PAGE 294
LESSOR Walter Satrom and
Ruby L. Satrom, husband and wife
LESSEE GeoResources, Inc.
DATE 3/14/75
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2,
and other lands not subject
to this agreement
ACRES 157.31
BOOK 186
PAGE 296
LESSOR Melvin Ballantyne and
Russell Ballantyne
LESSEE GeoResources, Inc.
DATE 9/23/77
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2
ACRES 157.31
BOOK 207
PAGE 404
LESSOR Phillips Petroleum Company
LESSEE GeoResources, Inc.
DATE 4/20/77
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2
ACRES 157.31
BOOK 212
PAGE 25
LESSOR Great American Royalties, Inc.
LESSEE GeoResources, Inc.
DATE 9/23/77
DESCRIPTION Township 162 North, Range 81 West
Section 30: E1/2NW1/4, Lots 1 and 2
ACRES 157.31
BOOK 254
PAGE 546
Well Schedule (Wells in the pooled area described as the NE1/4 Sec. 25, T162N
R82W and the NW1/4 Sec. 30, T162N R81W containing 317.31 acres)
Well Name Working Interest Net Revenue
Percentage Interest
Percentage
Ballantyne-State #1 100.0 81.40854
Ballantyne-State #3 100.0 81.40854
William Steinhaus #1 SWD 100.0 N/A
William Steinhaus #2 100.0 81.40854
Ballantyne-State/Steinhaus #H1 100.0 81.40854
MEMORANDUM
OF
AGREEMENT RELATING TO PURCHASE OF CRUDE OIL
STATE OF NORTH DAKOTA }
} ALL PERSONS BY THESE PRESENTS:
COUNTY OF BOTTINEAU }
COUNTY OF McHENRY }
COUNTY OF McKENZIE }
COUNTY OF RENVILLE }
THAT, as of the effective date hereof, GEORESOURCES, INC., a Colorado
corporation ("Seller"), and KOCH OIL COMPANY ("Buyer"), have entered into
certain agreements relating to a preferential right granted to Koch Oil by
Seller to purchase crude oil produced by Seller (referred to herein as the
"Purchase Agreement"), with respect to Properties described on Exhibit "A"
attached hereto.
1. Definitions. Unless otherwise defined herein or the context
otherwise requires, capitalized terms used in this Memorandum have the
meanings provided in the Purchase Agreement.
2. Preferential Right to Purchase. The Purchase Agreement provide
that, on and subject to the terms, provisions and conditions of the Purchase
Agreement, Seller has granted to Buyer a preferential right to purchase the
hydrocarbons produced from the Properties from the date hereof for the period
extending to the later of (a) three (3) years from the date hereof and (b) the
term of any note or other financing instrument existing between Seller and
Buyer's affiliate, Koch Producer Services, Inc.
3. Controlling Document. If any of the terms set forth in this
Memorandum conflict with any of the terms set forth in the Purchase Agreement,
the terms of the Purchase Agreement shall control and supersede any terms of
this Memorandum. It is the intent of this Memorandum to give notice to third
parties that Buyer and Seller have entered into the Purchase Agreement
relating to the Properties. It is not the purpose of this Memorandum to
amend, modify, eliminate, or add to the provisions of such Purchase Agreement.
4. Successors and Assigns. The right and obligations of the parties
to the Purchase Agreement are binding on, and inure to the benefit of, the
respective permitted successors and assigns of the parties.
5. Automatic Expiration of Notice. This Memorandum, and the notice
of the Purchase Agreements provided hereby, shall immediately and
automatically expire and be without further force or affect on December 31,
2010, unless a fully executed original of an agreement extending the notice
provided hereby, executed by both Seller and Buyer, shall be recorded in the
Official Public Records of Real Property of Bottineau, North Dakota, on or
before such date.
IN WITNESS WHEREOF, Seller and Buyer have executed this Memorandum to
be effective as of the 1st day of December, 1997.
SELLER:
GEORESOURCES, INC.
By: /s/ J. P. Vickers
Name: J. P. Vickers
Title: President
ATTESTING WITNESSES TO
SIGNATURE OF SELLER:
/s/ Cathy Kruse
/s/ Connie Hval
BUYER:
KOCH OIL COMPANY
By: /s/ James B. Urban
Name: James B. Urban
Title: Vice President,
Koch Oil Company
ATTESTING WITNESSES TO
SIGNATURE OF BUYER:
/s/ Michael A. Dooms
/s/
ACKNOWLEDGMENTS
STATE OF NORTH DAKOTA )
) SS.
COUNTY OF WILLIAMS )
BE IT REMEMBERED that I, Donna C. Hanson, a Notary Public duly
qualified, commissioned, sworn and acting in and for the County and State
aforesaid, hereby certify that, on this 3rd day of December, 1997, there
appeared before me J. P. Vickers, the President of GeoResources, Inc., a
Colorado corporation, whose address is 1407 West Dakota Parkway, Suite 1-B,
Williston, ND 58801.
TEXAS This instrument was acknowledged before me on this day
by each such person as the designated officer of the
company set opposite his name (or a Trustee, as the
case may be) on behalf of said company set opposite
his name (or of himself as Trustee, as the case may
be).
NORTH DAKOTA Before me personally appeared each such person, each
of whom is known to me to be the officer of the
corporation or association described in and that
executed this instrument, and acknowledged to me that
such corporation or association executed the same.
Witness my hand and official seal.
/s/ Donna C. Hanson
Notary Public
Residing at Williston, ND
My commission expires:
September 5, 2002
ACKNOWLEDGMENTS
State of Kansas )
) SS.
County of Sedgwick )
This instrument was acknowledged before me on December 5, 1997 by
James B. Urban, Vice President of KOCH OIL COMPANY, a division of Koch
Industries, Inc., a Kansas Corporation, on behalf of the corporation.
Witness my hand and official seal.
/s/ Michael A. Dooms
Notary Public
My Commission expires:
2/7/2001
Recording Requested by, and
after Recordation Return to:
MAYER, BROWN & PLATT
700 Louisiana Street
Houston, Texas 77002
Attn: Francis R. Bradley, III
Exhibit A - Description of Properties
Exhibit A
Description of Properties
EXHIBIT "A"
Koch Exchange Contract Number 36123
LSE NBR PROPERTY NAME COUNTY ST
20854 Dagmar Fossum Bottineau ND
59284 Oscar Fossum #4 Bottineau ND
59285 Oscar Fossum Bottineau ND
Koch Exchange Contract Number 13692
LSE NBR PROPERTY NAME COUNTY ST
54270 PEOC McKenzie ND
66416 Mott Renville ND
10300 Carroll Brandt Bottineau ND
34863 Anderson Bottineau ND
816 Carroll Aitken Renville ND
1930 Anderson et al Bottineau ND
24840 Hultgren Bottineau ND
31289 Billehus Bottineau ND
39755 Lawrence Hanson Bottineau ND
43982 Arthur Hetland McHenry ND
43992 Stella Rice Bottineau ND
44005 Hanson State Bottineau ND
44012 W&M Peterson Bottineau ND
44014 Witteman Bottineau ND
44019 USA Johnson Bottineau ND
44025 John Waddle Bottineau ND
44051 Obert Linstad Bottineau ND
48317 O&V Johnson Bottineau ND
48318 V&F Johnson Bottineau ND
48319 Lillegard-Johnson Bottineau ND
48904 Juve Bottineau ND
51954 Grann County Bottineau ND
55257 Grann Bottineau ND
56010 Johnson-Lillegard Bottineau ND
56074 Harold Lindstrom Bottineau ND
59273 Romos Bottineau ND
59274 Welstad McHenry ND
68115 Walter G. Nelson Bottineau ND
68927 Howard Nordmark Bottineau ND
70063 Waddle Olson Bottineau ND
71965 Elof G. Pearson Bottineau ND
77240 Rice Bottineau ND
88608 Sveen Bottineau ND
90472 Tolstad Bottineau ND
1859 Anton Anderson Bottineau ND
CERTIFICATE OF CONSENTS AND APPROVALS
I, J. P. Vickers, do hereby certify that I am the presently elected,
qualified and acting President of GeoResources, Inc., a Colorado corporation;
and certify the following in regard to Paragraph 12(c) to that certain
Purchase Agreement for Volumetric Production Payment ("Purchase Agreement")
between GeoResources, Inc. and Koch Producer Services, Inc. dated as of
December 3, 1997.
That to the best of my knowledge, and after due investigation no
consents, approvals, and permits from any federal or state regulatory
agencies, governmental authorities or from any other Persons are
necessary for the consummation of the Purchase Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand in my official capacity
and affixed the Corporate Seal this 3rd day of December, 1997.
/s/ J. P. Vickers
J. P. Vickers, President
GeoResources, Inc.
(Corporate Seal)
CERTIFICATE OF REPRESENTATIONS AND COVENANTS
I, J. P. Vickers, do hereby certify that I am the presently elected,
qualified and acting President of GeoResources, Inc., a Colorado corporation;
and certify that the following in regard to Paragraph 12(d) to that certain
Purchase Agreement for Volumetric Production Payment ("Purchase Agreement")
between GeoResources, Inc. and Koch Producer Services, Inc. dated as of
December 3, 1997.
That to the best of my knowledge, and after due investigation Seller
has performed all agreements and covenants required by the Purchase
Agreement and the other Production Payment Documents, and all
representations and warranties in the Purchase Agreement and in the
other Production Payment Documents are true and correct as of the
Closing Date.
IN WITNESS WHEREOF, I have hereunto set my hand in my official capacity
and affixed the Corporate Seal this 3rd day of December, 1997.
/s/ J. P. Vickers
J. P. Vickers, President
GeoResources, Inc.
(Corporate Seal)
CERTIFICATE OF NO LITIGATION
I, J. P. Vickers, do hereby certify that I am the presently elected,
qualified and acting President of GeoResources, Inc., a Colorado corporation;
and certify that the following in regard to Paragraph 12(k) to that certain
Purchase Agreement for Volumetric Production Payment ("Purchase Agreement")
between GeoResources, Inc. and Koch Producer Services, Inc. dated as of
December 3, 1997.
That to the best of my knowledge, and after due investigation no
suit, action or other proceeding is pending to restrain, enjoin, or
otherwise prevent the consummation of the Purchase Agreement or the
transactions contemplated in connection therewith or which may have
any material effect on the Subject Interests.
IN WITNESS WHEREOF, I have hereunto set my hand in my official capacity
and affixed the Corporate seal this 3rd day of December, 1997.
/s/ J. P. Vickers
J. P. Vickers, President
GeoResources, Inc.
(Corporate Seal)
CERTIFICATE OF LIABILITY INSURANCE
PRODUCER COMPANIES AFFORDING COVERAGE
First American Insurance CNA Insurance Companies
P.O. Box 1549
Minot ND 58702
701-852-1277
Insured
GeoResources, Inc. &
Belmont Natural Resource
Company, Inc.
P.O. Box 1505
Williston ND 58801
COVERAGES
THIS IS TO CERTIFY THAT THE POLICIES OF INSURANCE LISTED BELOW HAVE BEEN
ISSUED TO THE INSURED NAMED ABOVE FOR THE POLICY PERIOD INDICATED,
NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER
DOCUMENT WITH RESPECT TO WHICH THIS CERTIFICATE MAY BE ISSUED OR MAY
PERTAIN, THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT
TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. LIMITS SHOWN
MAY HAVE BEEN REDUCED BY PAID CLAIMS.
TYPE OF INSURANCE COMMERCIAL GENERAL LIABILITY
POLICY NUMBER C155850626
POLICY EFFECTIVE DATE 11/01/97
POLICY EXPIRATION DATE 11/01/98
GENERAL AGGREGATE LIMIT $3,000,000
PRODUCTS-COMP/OP AGG $3,000,000
PERSONAL & ADV INJURY $1,000,000
EACH OCCURRENCE $1,000,000
FIRE DAMAGE $50,000
MED EXP $5,000
TYPE OF INSURANCE AUTOMOBILE LIABILITY
POLICY NUMBER C155850643
POLICY EFFECTIVE DATE 11/01/97
POLICY EXPIRATION DATE 11/01/98
COMBINED SINGLE LIMIT $1,000,000
TYPE OF INSURANCE EXCESS LIABILITY
POLICY NUMBER C162776523
POLICY EFFECTIVE DATE 11/01/97
POLICY EXPIRATION DATE 11/01/98
EACH OCCURRENCE $2,000,000
AGGREGATE $2,000,000
TYPE OF INSURANCE WORKERS COMPENSATION AND EMPLOYERS'
LIABILITY
POLICY NUMBER C155850626 - CONTINGENT EMPLOYERS
LIABILITY ONLY
POLICY EFFECTIVE DATE 11/01/97
POLICY EXPIRATION DATE 11/01/98
EL EACH ACCIDENT $2,000,000
EL DISEASE - POLICY LIMIT $2,000,000
EL DISEASE - EA EMPLOYEE $2,000,000
DESCRIPTION OF OPERATIONS/LOCATIONS/VEHICLES/SPECIAL ITEMS
GL policy contains Contractual Liability w/Waiver of Subrogation regarding
contracts signed pertaining to insured's business. Certificate Holder is
named as an Additional insured.
CERTICATE HOLDER
KOCHP-1
KOCH PRODUCER SERVICES
ATTN: MARK VIVIEN
600 TRAVIS ST STE 5300
HOUSTON TX 77002
CANCELLATION
SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELLED BEFORE THE
EXPIRATION DATE THEROF, THE ISSUING COMPANY WILL ENDEAVOR TO MAIL 30 DAYS
WRITTEN NOTICE TO THE CERTIFICATE HOLDER NAMED TO THE LEFT, BUT FAILURE TO
MAIL SUCH NOTICE SHALL IMPOSE NO OBLICATION OR LIABILITY OF ANY KIND UPON
THE COMPANY, ITS AGENTS OR REPRESENTATIVES.
AUTHORIZED REPRESENTATIVE
/S/ JANET K. CHRISTENSON
CERTIFIED COPY OF RESOLUTION
I, Cathy Kruse, do hereby certify that I am the presently elected,
qualified and acting Secretary of GeoResources, Inc., a Colorado corporation;
that the resolutions set forth below were duly adopted by members of the Board
or Directors of the corporation on November 20, 1997; and that such
resolutions have not been amended or repealed and are in full force and effect
on the date hereof.
RESOLVED, that GeoResources, Inc. (the "Corporation"), a Colorado
corporation, be, and hereby is, authorized, to execute any and all
documents required in connection with that certain Purchase Agreement
for Volumetric Production Payment between the Corporation and Koch
Producer Services, Inc. including without limitation conveyances,
purchase agreements, and all other associated agreements related to
the Purchase Agreement for Volumetric Production Payment.
FURTHER RESOLVED, that Jeffrey P. Vickers, President of the
Corporation, and/or the Corporation Secretary, be, and they hereby
are, authorized, empowered and directed, on behalf of the Corporation,
to execute the documents referenced above, including making such
changes as are advised by counsel, and to take such other actions and
execute such additional documents as may be necessary and desirable
to carry out the intent and purposes of the foregoing resolution.
IN WITNESS WHEREOF, I have hereunto set my hand in my official
capacity and affixed the Corporate Seal this 3rd day of December, 1997.
(Corporate Seal) /s/ Cathy Kruse
Cathy Kruse, Secretary
GeoResources, Inc.
Certificate of Secretary
of
GeoResources, Inc.
I, Cathy Kruse, the duly elected, qualified and acting Secretary of
GeoResources, Inc., a Colorado Corporation (the "Company" do hereby certify
that the attached are true and correct copies of the documents listed below,
as amended through the date hereof:
Bylaws of GeoResources, Inc.
Articles of Incorporation of GeoResources, Inc.
In witness whereof, I have executed this Certificate and caused it to be
dated the 3rd day of December, 1997.
/s/ Cathy Kruse
Cathy Kruse, Corporate Secretary
(Corporate Seal)
BYLAWS OF GEORESOURCES, INC.
I. The President shall preside at all meetings of stockholders or directors,
and he shall perform all the duties usually pertaining to his office. He
shall, on demand of any director, call special meetings of the directors
of stockholders. Checks and other negotiable instruments may be signed
either by the President or the Secretary.
II. As soon as practicable after each annual election of directors, the Board
of Directors shall meet for the purpose of organization, electing or
appointing officers of the corporation, and transaction of other
business, at the place where the shareholders' meeting is held, or at
such other place in or out of the State of Colorado, as the Board of
Directors may determine.
II.A. The annual meeting of the shareholders of the Corporation entitled to
vote shall be held at the principal office of the Corporation or at
such other place, within or without the State of Colorado, as is
designated by the Board of Directors, at such time on such day during
the month of June of each year (other than a Saturday, Sunday or
holiday), or during such other month as shall be determined by the
Board of Directors. At the annual meeting, the shareholders, voting
as provided in the Articles of Incorporation, shall elect directors
and shall transact such other business as shall properly come before
the meeting.
III. The Vice-President shall, in the event of the absence or disability of
the President, perform the duties of the President.
IV. The Treasurer shall have custody of all the monies of the Corporation.
He shall keep regular books of account. All money of the Corporation
shall be deposited in each such depository or depositories as shall be
selected by the directors. In addition, the Treasurer shall perform
all duties usually pertaining to his office.
V. The Secretary shall keep the records of the Corporation. He shall have
the custody of the seal of the Corporation. He shall sign, issue and
seal all certificates of stock, which certificates shall also be signed
by the President. The secretary shall, in addition, perform all the
duties usually pertaining to his office. The Assistant Secretary
shall, in the event of absence, death, disability, or resignation of
the Secretary, perform the duties of the Secretary.
VI. Regular meetings of the directors shall be held at such time and place
as the directors may determine. No written notice of such meetings
shall be required, and it shall be the duty of each director to attend
the same without written notice.
VII. Special meetings of the directors may be called by the President on one
day's notice, or such special meetings may be held at any time on one
day's notice at the call of any one director, and attendance shall be
mandatory whether such meetings are called by the President or a
director. At regular or special meetings, a majority of the directors
shall constitute a quorum.
VIII. At all meetings of stockholders, regular or special, each holder of
voting stock shall be entitled to one vote for each share of stock held
by him, except as otherwise provided for in the Certificate of
Incorporation. At such meetings, each stockholder may vote either in
person or by written proxy.
IX. At all meetings of the stockholders, regular or special, a majority of
the voting stock shall constitute a quorum. A majority of a quorum of
voting stock may decide any question coming before the meeting, except
as is required by Colorado Corporate law.
X. It shall not be necessary to have an annual meeting to elect or remove
directors. Directors may be elected or removed at any time by a
majority vote of the outstanding voting stock.
XI. It shall not be necessary that an office or director of this Corporation
be a holder of the stock of this Corporation.
XXI. All real estate and interests in real estate may be conveyed, leased,
or otherwise disposed of upon the signatures of the President and the
Secretary of this Corporation.
XIII. The Corporation shall have a lien upon each share of stock for any
indebtedness due to it from the holder thereof. Stock of the
Corporation may only be transferred on the books of the Corporation and
upon surrender of all outstanding certificates for such stock.
XIV. All stock of this Corporation shall be nonassessable.
XV. [Abolished].
XVI. Officers, directors, and shareholders may contract with this Corporation
for goods and services, but the Corporation shall not pay more than the
value of such goods or services upon the open market.
(A) Officers, directors and stockholders shall, when they render
services or furnish goods to the Corporation, or incur expenses for the
Corporation, or furnish goods to the Corporation, bill the Corporation.
(B) No salaries for professional services of the stockholders shall be
paid out of money received from the sale of stock of the Corporation.
However, disbursements made out of pocket by such shareholders for the
Corporation may be made from the source.
XVII. The seal of this Corporation shall consist of a circle, within which
shall be inscribed, "GeoResources, Inc."
THE ARTICLES OF INCORPORATION
OF
GEORESOURCES, INC.
Pursuant to the provisions of the Colorado Corporation Code, the
undersigned Corporation hereby composites its Articles of Incorporation as
amended as follows:
ARTICLE I.
The name of the corporation is GeoResources, Inc.
ARTICLE II.
The object for which our said Corporation is formed and incorporated is
for the purpose of exploring, developing, and marketing natural resources, and
to do everything necessary and incidental to carrying such object.
ARTICLE III.
This corporation shall have perpetual existence.
ARTICLE IV.
The authorized capital stock of GeoResources, Inc. is Ten Million
(10,000,000) shares of common stock with a par value of one cent ($.01) per
share. All of the shares when issued are fully paid and nonassessable. All
of the shares vote for all purposes at all shareholders meetings and each
share is equal to each other with respect to liquidation and dividend rights.
ARTICLE V.
The affairs and management of this corporation are to be under the
control of a board of directors consisting of not less than three (3) members
nor more than ten (10) members. Directors may be removed at any time by a
majority vote of the outstanding voting stock, and at that time other
directors may be elected.
ARTICLE VI.
The principal office of this corporation shall be located at the post
office address of 1801 Tabor Street, Denver 15, Colorado, which address is in
the County of Jefferson and State of Colorado.
ARTICLE VII.
This corporation shall have the power to conduct business in the State
of Colorado, any other state of the United States and in foreign countries and
shall have the power to have one or more offices out of the State of Colorado.
It shall also have power to hold, purchase, mortgage, lease, claim, convey,
and to otherwise acquire and dispose of real and personal property out of the
State of Colorado.
ARTICLE VIII.
A stock ledger and other books of record of this corporation shall be
kept within the State of Colorado in charge of the said Rollin C. Vickers
whose office address is 1801 Tabor Street, Denver 15, Colorado.
ARTICLE IX.
The directors of our corporation shall have the power to make such by-
laws as they deem proper for the management of the affairs of the corporation.
ARTICLE X.
Cumulative voting shall be allowed.
ARTICLE XI.
No holder of any stock or other security of the corporation shall have
any pre-emptive right to subscribe for or purchase his proportionate share of
any stock or other security of the corporation now or hereafter authorized or
issued or of treasury shares sold or otherwise disposed of by the corporation.
IN WITNESS WHEREOF, we have hereunto set our hands and seal this 1st
day of March, 1984.
/s/ J. P. Vickers
J. P. Vickers, President
/s/ Cathy L. Callahan
Cathy L. Callahan, Secretary/Treasurer
CERTIFICATE OF INCUMBENCY
I, Cathy Kruse, do hereby certify that I am the presently elected,
qualified and acting Secretary of GeoResources, Inc., a Colorado Corporation
and that the following were elected as officers of GeoResources, Inc. in their
capacity so stated on June 12, 1997, to serve during the ensuing year and
until their successors are duly elected and qualified.
J. P. Vickers
President, Chief Executive
Officer and Chief Financial
Officer /s/ J.P. Vickers
Signature
Cathy Kruse
Secretary/Treasurer /s/ Cathy Kruse
Signature
IN WITNESS WHEREOF, I have hereunto set my hand in my official capacity
and affixed the corporate seal this 3rd day of December, 1997.
(Corporate Seal) /s/ Cathy Kruse
Cathy Kruse, Secretary
GeoResources, Inc.
STATE OF COLORADO
DEPARTMENT OF
STATE
CERTIFICATE
I, VICTORIA BUCKLEY, SECRETARY OF STATE OF THE STATE OF COLORADO
HEREBY CERTIBY THAT
ACCORDING TO THE RECORDS OF THIS OFFICE
GEORESOURCES, INC.
(COLORADO CORPORATION)
FILE # 19871179128 WAS FILED IN THIS OFFICE ON October 06, 1958 AND HAS
COMPLIED WITH THE APPLICABLE PROVISIONS OF THE LAWS OF THE STATE OF COLORADO
AND ON THIS DATE IS IN GOOD STANDING AND AUTHORIZED AND COMPETENT TO TRANSACT
BUSINESS OR TO CONDUCT ITS AFFAIRS WITHIN THIS STATE.
Dated: November 14, 1997
/s/ Victoria Buckley
SECRETARY OF STATE
STATE OF NORTH DAKOTA
SECRETARY OF STATE
CERTIFICATE OF GOOD STANDING
OF
GeoResources, Inc.
The undersigned, as Secretary of State of the State of North
Dakota, hereby certifies that GEORESOURCES, INC., a Colorado corporation,
authorized to transact business in the State of North Dakota on December 3,
1962, and according to the records of this office as of this date, has paid
all fees due this office as required by North Dakota statutes governing
foreign corporations.
ACCORDINGLY the undersigned, as such Secretary of State, and by
virtue of the authority vested in him by law, hereby issues this Certificate
of Good Standing to
GEORESOURCES, INC.
Dated: November 20, 1997
/s/ Alvin A. Jaeger
Alvin A. Jaeger
Secretary of State
PROMISSORY NOTE
$3,000,000 December 5, 1997
Billings, Montana
FOR VALUE RECEIVED, GEORESOURCES, INC., a Colorado corporation
("Borrower"), promises to pay to the order of NORWEST BANK MONTANA, NATIONAL
ASSOCIATION ("Payee"), the principal sum of $3,000,000, or such lesser amount
as may be borrowed hereunder, together with interest on the outstanding unpaid
balance of such principal amount at the rate provided below.
This Note is issued pursuant to, and is subject to the terms and
provisions of, the Amended and Restated Secured Term Loan and Revolving Credit
Agreement (the "Credit Agreement"), dated as of December 5, 1997, between
Borrower and Payee. Except as otherwise defined herein, terms defined in the
Credit Agreement shall have the same meanings when used herein.
The outstanding principal amount of this Note shall be payable as
provided in the Credit Agreement. The entire outstanding principal balance of
this Note shall be due and payable on January 5, 2005 (unless payable sooner
pursuant to the terms of the Credit Agreement) and shall bear interest
initially at the fluctuating rate, adjustable the day of any change, equal to
the annual rate publicly announced or published from time to time by Norwest
Bank Minnesota, National Association as its "base" or "prime" rate, which may
not be the lowest interest rate charged by Payee (the "Base Rate"), plus
three-quarters of one percentage point per annum.
Interest shall accrue daily, shall be payable on the fifth day of each
month, commencing January 5, 1998, and at the maturity of this Note.
All payments of principal and interest hereon shall be made at Payee's
offices at 175 North 27th Street, Billings, Montana 59101 (or at such other
place as Payee shall have designated to Borrower in writing) on the date due
in immediately available funds and without set-off or counterclaim or
deduction of any kind. All payments received hereunder shall be applied first
to costs of collection, second to accrued interest as of the date of payment
and third to the outstanding principal balance of this Note.
This Note is secured by, and the holder of this Note is entitled to the
benefits of, the documents described in the Credit Agreement (the "Security
Documents"). Reference is made to the Security Documents for a description of
the property covered thereby and the rights, remedies and obligations of the
holder hereof in respect thereto.
Subject to the expiration of any applicable period of grace provided for
in the Credit Agreement, in the event of (a) any default in any payment of the
principal of or interest on this Note when due and payable, or (b) any other
Event of Default (as defined in the Credit Agreement), then the whole
principal sum of this Note plus accrued interest and all other obligations of
Borrower to holder, direct or indirect, absolute or contingent, now existing
or hereafter arising, shall, at the option of Payee, become immediately due
and payable, and any or all of the rights and remedies provided herein and in
the Credit Agreement and the Security Documents, as they may be amended,
modified or supplemented from time to time may be exercised by Payee.
If Borrower fails to pay any amount due under this Note and Payee has to
take any action to collect the amount due or to exercise its rights under the
Security Documents, including without limitation retaining attorneys for
collection of this Note, or if any suit or proceeding is brought for the
recovery of all or any part of or for protection of the indebtedness or to
foreclose the Security Documents or to enforce Payee's rights under the
Security Documents, then Borrower agrees to pay on demand all reasonable costs
and expenses of any such action to collect, suit or proceeding, or any appeal
of any such suit or proceeding, incurred by Payee, including without
limitation the reasonable fees and disbursements of Payee's attorneys and
their staff.
Borrower waives presentment, notice of dishonor and protest, and assents
to any extension of time with respect to any payment due under this Note, to
any substitution or release of collateral and to the addition or release of
any party, except as provided in the Credit Agreement. No waiver of any
payment or other right under this Note shall operate as a waiver of any other
payment or right.
If any provision in this Note shall be held invalid,
illegal or unenforceable in any jurisdiction, the validity, legality or
enforceability of any defective provisions shall not be in any way affected or
impaired in any other jurisdiction.
No delay or failure of the holder of this Note in the exercise of any
right or remedy provided for hereunder shall be deemed a waiver of such right
by the holder hereof, and no exercise of any right or remedy shall be deemed
a waiver of any other right or remedy that the holder may have.
All notices given hereunder shall be given as provided in the Credit
Agreement.
This Note is to be governed by and construed according to the laws of
the State of Montana.
GEORESOURCES, INC.
By: /s/ J. P. Vickers
J. P. Vickers,
President
AMENDED AND RESTATED SECURED TERM LOAN AND
REVOLVING CREDIT AGREEMENT
THIS AMENDED AND RESTATED SECURED TERM LOAN AND REVOLVING CREDIT
AGREEMENT, made as of December 5, 1997, is by and between GEORESOURCES, INC.,
a Colorado corporation (herein called "Borrower"), and NORWEST BANK MONTANA,
NATIONAL ASSOCIATION, a national banking association (herein called
"Norwest").
RECITALS
A. Borrower and Norwest entered into an Amended and Restated Secured
Term Loan and Revolving Credit Agreement dated as of September 1, 1995 (the
"Prior Credit Agreement"), which provided for the following: (1) an
amortizing term loan, the outstanding principal balance of which was $300,000
as of September 1, 1995, which loan has been repaid in full, and (2) an
amortizing term loan, the outstanding principal balance of which was $765,000
as of September 1, 1995, and (3) a revolving line of credit in the maximum
amount of $1,000,000.
B. Borrower and Norwest wish to enter into this Amended and Restated
Secured Term Loan and Revolving Credit Agreement in order to amend and restate
in their entirety the terms and provisions of the Prior Credit Agreement and
to provide for the terms upon which: (1) the loan and the line of credit
described in Recitals A(2) and A(3) above will be continued, and (2) Norwest
will make available to Borrower an additional revolving line of credit in the
maximum amount of $3,000,000.
AGREEMENT
IN CONSIDERATION of the following covenants, Borrower and Norwest agree
as follows:
ARTICLE I
Definitions and Accounting Terms
Section 1.01. Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Advance" means any advance made to Borrower pursuant to Section 2.01(c)
below.
"Agreement" means this Amended and Restated Secured Term Loan and
Revolving Credit Agreement, as the same may hereafter be amended from time to
time.
"Borrowing Base" means, at any time, the aggregate loan value of the
Collateral, as determined by Norwest in accordance with the provisions of
Section 2.09 below; provided that the Borrowing Base for the time period from
the date of this Agreement through March 31, 1998 shall be $3,691,000, unless
Borrower and Norwest hereafter mutually agree upon a different amount or
unless the Borrowing Base is redetermined pursuant to the terms of this
Agreement prior to the end of such time period.
"Business Day" means any day other than a Saturday, Sunday or legal
holiday in the State of Montana on which banks are not required to be open for
business in Billings, Montana.
"Collateral" means any and all oil or gas properties, oil or gas
interests and related assets and properties covered by any of the Security
Documents.
"Current Ratio" means, at any time and from time to time, the ratio of:
(a) Borrower's current assets; to (b) Borrower's current liabilities
(excluding regularly scheduled current maturities of long-term debt), all
determined in accordance with generally accepted accounting principles
consistently applied.
"Debt" means, for any Person: (a) all items of indebtedness or
liabilities which in accordance with generally accepted accounting principles
would be included in determining total liabilities as shown on the liability
side of a balance sheet of that Person as of the date as of which Debt is to
be determined, and (b) indebtedness secured by any mortgage, pledge, lien or
security interest existing on property owned by such Person, whether or not
the indebtedness secured thereby shall have been assumed.
"Event of Default" means any of the events described in Section 6.01
below.
"Loan Documents" shall mean this Agreement, the 1993 Revolver/Term Note,
the 1995 Note, the 1997 Note, the Security Documents and any other documents
executed by Borrower pursuant hereto.
"Maximum 1995 Loan Amount" means, at any time, the lesser of: (a)(l)
the Borrowing Base, minus (2) the then-outstanding principal balance of the
1997 Loan, minus (3) the then-outstanding principal balance of the 1993
Revolver/Term Loan; or (b) $1,000,000.
"Maximum 1997 Loan Amount" means, at any time, the lesser of: (a)(l)
the Borrowing Base, minus (2) the then-outstanding principal balance of the
1995 Loan, minus (3) the then-outstanding principal balance of the 1993
Revolver/Term Loan; or (b) $3,000,000.
"Minimum 1995 Loan Payment Amount" means the following:
(a) with respect to any Payment Date occurring on or before
December 5, 1997, the amount of interest accrued on the 1995 Loan through such
Payment Date;
(b) with respect to any Payment Date occurring after December 5,
1997 but prior to December 5, 2001, the sum of: (1) the amount of interest
accrued on the 1995 Loan through such Payment Date, plus (2) the product of:
(A) 0.02083333 (1/48), times (B) the outstanding principal balance of the 1995
Loan as of the close of business on December 8, 1997; and
(c) with respect to the maturity date of the 1995 Loan on December
5, 2001, the outstanding principal balance of the 1995 Loan plus interest
accrued through such date.
"Minimum 1997 Loan Payment Amount" means the following:
(a) with respect to any Payment Date occurring on or before
January 5, 2001, the amount of interest accrued on the 1997 Loan through such
Payment Date;
(b) with respect to any Payment Date occurring after January 5,
2001 but prior to January 5, 2005, the sum of: (1) the amount of interest
accrued on the 1997 Loan through such Payment Date, plus (2) the product of:
(A) 0.02083333 (1/48), times (B) the outstanding principal balance of the 1997
Loan as of the close of business on January 5, 2001; and
(c) with respect to the maturity date of the 1997 Loan on January
5, 2005, the outstanding principal balance of the 1997 Loan plus interest
accrued through such date.
"Notes" means the 1995 Note, the 1997 Note and the 1993 Revolver/Term
Note.
"Oil and Gas Properties" means from time to time, all oil and/or gas
properties, pipelines, gathering systems, gas plants and related interests
owned by Borrower.
"Payment Date" means the fifth day of each month, commencing January 5,
1998.
"Person" means an individual, partnership, corporation (including a
business trust), limited liability company, joint stock company, trust,
unincorporated association, joint venture or other entity, or a foreign state
or political subdivision thereof or any agency of such state or subdivision.
"Prior Credit Agreement" means the agreement defined as such in Recital
A above.
"Related Person" means any other Person controlled by, controlling or
under common control with Borrower, including without limitation any
subsidiary of Borrower and any officer or director of Borrower.
"Security Documents" means the Mortgage, Security Agreement, Assignment
of Production and Financing Statement dated as of April 29, 1993, from
Borrower to Norwest's predecessor and any and all the deeds of trust,
mortgages, chattel mortgages, assignments of proceeds, security agreements,
financing statements, pledge agreements, assignments of and/or amendments to
any of the foregoing and other instruments in form and substance satisfactory
to Norwest executed by Borrower as provided herein, granting to and perfecting
in favor of Norwest first and prior liens on or security interests in any
portion of the Oil and Gas Properties required pursuant to this Agreement.
"Tangible Net Worth of Borrower" means the excess of: (a) the tangible
assets of Borrower, determined in accordance with generally accepted
accounting principles, after deducting adequate reserves in each case where,
in accordance with generally accepted accounting principles, a reserve is
proper, over (b) all Debt of Borrower; provided however, that: (1) in no
event shall there be included as tangible assets, patents, trademarks,
tradenames, copyrights, licenses, goodwill, prepaid expenses to the extent
they exceed $50,000 in the aggregate, deferred charges, notes or accounts
receivable due from Related Persons, or any securities unless the same are
readily marketable in the United States of America or entitled to be used as a
credit against federal income tax liabilities, (2) securities included as such
tangible assets shall be taken into account as required by generally accepted
accounting principles applicable to publicly-traded companies, and (3) any
write-up in the book value of any assets shall not be taken into account.
"1993 Revolver/Term Loan" means the loan described in Recital A(2)
above, and any and all modifications to such loan as may be contemplated by
Section 2.01(b) below.
"1993 Revolver/Term Note" means the Promissory Note dated as of April
29, 1993, made by Borrower, payable to the order of NBB, in the face amount of
$1,000,000, as previously amended and as amended by an Allonge in the form of
Exhibit A attached hereto and made a part hereof, which promissory note, as so
amended, shall evidence the 1993 Revolver/Term Loan.
"1995 Loan" means the revolving line of credit made available to
Borrower by Norwest in accordance with the terms of this Agreement, as such
revolving line of credit is to be converted to an amortizing term loan as of
December 8, 1997 in accordance with the terms of this Agreement.
"1995 Note" means the Promissory Note dated September 1, 1995, made by
Borrower, payable to the order of Norwest, in the face amount of $1,000,000,
as amended by an Allonge in the form of Exhibit B attached hereto and made a
part hereof, which promissory note, as so amended, shall evidence the 1995
Loan.
"1997 Loan" means the revolving line of credit made available to
Borrower by Norwest in accordance with the terms of this Agreement, as such
revolving line of credit is to be converted to an amortizing term loan as of
January 5, 2001 in accordance with the terms of this Agreement.
"1997 Note" means the Promissory Note of even date herewith, made by
Borrower, payable to the order of Norwest, in the form of Exhibit C attached
hereto and made a part hereof, which 1997 Note shall evidence the 1997 Loan.
Section 1.02. Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with generally accepted
accounting principles consistently applied.
ARTICLE II
The Loans
Section 2.01. The Loans. (a) As of September 1, 1995, the 1993
Revolver/Term Loan was converted from a revolving line of credit to an
amortizing term loan in an amount equal to $765,000, the outstanding principal
balance of the 1993 Revolver/Term Loan as of the close of business on August
31, 1995. The 1993 Revolver/Term Loan shall be governed by the terms of this
Agreement and, as to certain matters (e.g., the amount and timing of principal
payments, the interest rate and the timing of interest payments), by the terms
of the 1993 Revolver/Term Note.
(b) As of December 8, 1997, the 1995 Loan is to be converted from
a revolving line of credit to an amortizing term loan in an amount equal to
$700,000, the outstanding principal balance of the 1995 Loan as of the close
of business on December 8, 1997. The 1995 Loan shall be governed by the terms
of this Agreement and, as to certain matters, by the terms of the 1995 Note.
(c) Subject to the terms and conditions hereof, Norwest agrees to
make Advances on the 1997 Loan to Borrower from time to time at the request of
Borrower upon at least one Business Day's notice to Norwest from Borrower;
provided that Norwest shall not have any obligation to: (1) make any Advance
after January 5, 2001; (2) make any Advance in an amount less than $10,000;
(3) make any Advance if, after the making of such Advance, the aggregate
outstanding principal balance of the 1997 Loan would exceed the Maximum 1997
Loan Amount. Within the limitation of the Maximum 1997 Loan Amount, and
subject to the other terms and provisions hereof, Borrower may borrow, repay
and reborrow hereunder.
Section 2.02. The Notes; Interest. (a) Borrower's obligation to repay
the 1995 Loan, with interest thereon, shall be evidenced by the 1995 Note.
The 1995 Note shall bear interest on the outstanding principal balance thereof
at the rates per annum provided in the 1995 Note. Borrower shall pay all
accrued and unpaid interest due on the 1995 Note on each Payment Date,
including without limitation on December 5, 2001, the maturity date of the
1995 Loan.
(b) Borrower's obligation to repay the 1997 Loan, with interest
thereon, shall be evidenced by the 1997 Note. The 1997 Note shall bear
interest on the outstanding principal balance thereof at the rates per annum
provided in the 1997 Note. Borrower shall pay all accrued and unpaid interest
due on the 1997 Note on each Payment Date, including without limitation on
January 5, 2005, the maturity date of the 1997 Loan.
Section 2.03. Mandatory Payments.
(a) On each Payment Date, Borrower shall make the following
payments to Norwest: (1) a payment on the 1995 Loan in the amount of the
Minimum 1995 Loan Payment Amount, and (2) a payment on the 1997 Loan in the
amount of the Minimum 1997 Loan Payment Amount, which payments shall be in
addition to: (A) any amounts payable (whether on a Payment Date or otherwise)
with respect to the 1993 Revolver/Term Loan, and (2) any amounts payable with
respect to the 1995 Loan or the 1997 Loan as otherwise set forth in this
Agreement, including without limitation as described in Section 2.03(b) below.
(b) If the aggregate outstanding principal balance of the 1995
Loan shall at any time exceed the Maximum 1995 Loan Amount and/or if the
aggregate outstanding principal balance of the 1997 Loan shall at any time
exceed the Maximum 1997 Loan Amount, Borrower shall, not later than 20 days
after written notice thereof from Norwest: (1) pay the excess to Norwest in a
lump sum; or (2) execute and deliver to Norwest additional mortgages,
supplements to mortgages or other instruments satisfactory in form and
substance to Norwest, by which Borrower mortgages, pledges or hypothecates to
Norwest, or creates a security interest in for the benefit of Norwest,
sufficient additional collateral to induce Norwest to make a redetermination
of the Borrowing Base such that the Maximum 1995 Loan Amount is an amount no
less than the aggregate outstanding principal balance of the 1995 Loan and the
Maximum 1997 Loan Amount is an amount no less than the aggregate outstanding
principal balance of the 1997 Loan.
(c) The entire outstanding principal balance of the 1995 Loan
shall be due and payable, if not sooner paid, on December 5, 2001. The entire
outstanding principal balance of the 1997 Loan shall be due and payable, if
not sooner paid, on January 5, 2 005.
Section 2.04. Time of Payments; Computations.
(a) Borrower shall make each payment hereunder and under each of
the Notes not later than 12:00 noon (Billings, Montana time) on the day when
due in lawful money of the United States of America to Norwest at its office
at 175 North 27th Street, Billings, Montana 59101 or at any other location
designated by Norwest.
(b) All computations of interest shall be made by Norwest on the
basis of a year of 365 or 366 days, as applicable, for the actual number of
days (including the first day but excluding the last day) occurring in the
period for which such interest is payable.
(c) Should any payment become due and payable on a day other than
a Business Day, the maturity of such payment shall be extended to the next
succeeding Business Day, and, in the case of a payment of principal or past
due interest, interest shall accrue and be payable thereon for the period of
such extension.
Section 2.05. Termination of Agreement. Borrower shall have the right
at any time and from time to time, upon not less than three business days'
prior written notice to Norwest, to terminate this Agreement. Upon any
termination of this Agreement, Borrower shall, at the time of such
termination, prepay all of the Notes in full. Any such prepayment shall be
without penalty or premium.
Section 2.06. Prepayment of the Loans. Borrower shall have the right
to prepay the principal amount of the 1993 Revolver/Term Loan, the 1995 Loan
or the 1997 Loan at any time as provided herein. Partial prepayments shall be
in the amount of $10,000 or integral multiples thereof. Each prepayment shall
be without premium or penalty. All prepayments shall first be applied to any
and all accrued interest and unpaid fees and then to unpaid principal, in the
inverse order of approaching maturities.
Section 2.07. Use of Proceeds. Proceeds of the 1995 Loan and the 1997
Loan shall be used by Borrower exclusively for the financing of Borrower's
working capital requirements and capital expenditures relating to the
acquisition, exploration and development of oil and gas properties.
Section 2.08. Fee. Borrower shall pay to Norwest, contemporaneously
with the execution and delivery of this Agreement, an origination fee in
respect of the 1997 Loan in the amount of $7,500.
Section 2.09. Borrowing Base Procedures. The Borrowing Base will be
re-determined at least annually by Norwest, as of April 1 of each year through
April 1, 2004 (and, at Norwest's sole discretion, Norwest may re-determine the
Borrowing Base at such other times as Norwest may elect to do so), in
accordance with the "Borrowing Base Calculations" described in Exhibit E
attached hereto and made a part hereof, based upon the engineering reports
submitted by Borrower pursuant to Article V below, the production information
submitted by Borrower pursuant to Article V below and such other information
and data as Norwest deems relevant, and using such assumptions as to pricing,
discount factors, discount rates, expenses, oil and gas prices and price
escalators, operating expense escalators and other factors as Norwest
customarily uses as to borrowing-base oil and gas loans at the time such re-
determination is made. If any such re-determination of the Borrowing Base by
Norwest results in a change in the Borrowing Base from the Borrowing Base
previously in effect, Norwest shall advise Borrower of such change by
providing to Borrower written notice thereof; provided that if Norwest does
not provide such a notice, then, unless Norwest gives notice to the contrary
to Borrower, the Borrowing Base from the previous period shall be carried over
into the new period until a notice is sent to Borrower by Norwest.
Section 2.10. The Security. Borrower's obligations hereunder will be
secured by the existing Security Documents and any additional Security
Documents hereafter delivered by Borrower and accepted by Norwest.
ARTICLE III
Conditions Precedent to 1995 Loan and 1997 Loan
Section 3.01. Conditions Precedent to 1995 Loan and 1997 Loan. Norwest
shall have no obligation to make the initial Advance or any subsequent Advance
under the 1995 Loan or the 1997 Loan unless Norwest shall have received all of
the following at its office in Billings, Montana, duly executed and delivered
and in form, substance and date satisfactory to Norwest:
(a) The Notes, including the allonges thereto.
(b) The Security Documents.
(c) An "Omnibus Certificate" of the Secretary of Borrower in
the form of Exhibit D attached hereto and made a part hereof.
(d) The fee payable by Borrower pursuant to Section 2.08 above.
(e) Such title opinions, supplemental title opinions, UCC
searches and other title information concerning
Borrower's title to the Collateral or any portions
thereof as may be satisfactory to Norwest.
(f) A written certification by Borrower that the Collateral has
been operated in compliance with all federal, state and
local environmental and waste disposal laws and/or copies
of any notices or communications received from any federal,
state or local authorities asserting that a violation of
such laws may have, or has, occurred, whether or not such
assertions are being contested by Borrower.
(g) Any and all other Loan Documents.
Section 3.02. Additional Conditions Precedent. Norwest shall have no
obligation to make the first or any subsequent Advance unless the following
conditions precedent have been satisfied:
(a) All representations and warranties made by Borrower in any
Loan Document shall be true on and as of the date of such Advance
as if such representations and warranties had been made as of the
date hereof.
(b) No Event of Default, and no event or condition which, with the
giving of notice, the lapse of time, or both, would constitute an
Event of Default, shall exist as of the date of such Advance.
(c) Borrower shall have performed and complied with all agreements
and conditions herein required to be performed or complied with by
it on or prior to the date of such Advance.
ARTICLE IV
Representations and Warranties
Section 4.01. Borrower's Representations and Warranties. To induce
Norwest to enter into this Agreement and to make the 1995 Loan and the 1997
Loan, Borrower represents and warrants to Norwest (which representations and
warranties shall survive the delivery of the 1995 Note and the 1997 Note and
shall be deemed to be continuing representations and warranties until
repayment in full of the 1995 Note and the 1997 Note and termination of this
Agreement) that:
(a) Organization and Good Standing. Borrower is a corporation
duly organized, validly existing and in good standing under the
laws of the State of Colorado, having all corporate powers
required to carry on its business and enter into and carry out the
transactions contemplated hereby. Borrower is duly qualified, in
good standing, and authorized to do business in all other
jurisdictions wherein the character of the properties owned or
held by it or the nature of the business transacted by it makes
such qualification necessary.
(b) Authorization. Borrower has duly taken all corporate action
necessary to authorize the execution and delivery by it of the
Loan Documents and to authorize the consummation of the
transactions contemplated thereby and the performance of its
obligations thereunder.
(c) No Conflicts or Consents. The execution and delivery by
Borrower of the Loan Documents, the performance by Borrower of its
obligations under such Loan Documents, and the consummation of the
transactions contemplated by the various Loan Documents, do not
conflict with any provision of any of the organizational documents
of Borrower or any agreement, judgment, license, order or permit
applicable to or binding upon Borrower.
(d) Enforceable Obligations. This Agreement and the other Loan
Documents constitute legal and binding obligations of Borrower,
enforceable in accordance with their respective terms.
(e) Financial Statements. The financial statements heretofore
furnished by Borrower to Norwest fairly present Borrower's
financial position at the date thereof and the results of
Borrower's operations and the changes in Borrower's financial
position for the period thereof. Since the date of the most
recent of said financial statements, no material adverse change
has occurred in Borrower's financial condition or business.
(f) Litigation. (1) There are no actions, proceedings or suits
pending or threatened against Borrower before any court,
department, commission, body, board, bureau, agency, or
instrumentality, which do or may materially and adversely affect
Borrower, Borrower's ownership or use of any of its assets or
properties, its business or financial condition or prospects, or
the right or ability of Borrower to enter into the Loan Documents
or perform its obligations thereunder, and (2) there are no
outstanding judgments, injunctions, writs, rulings or orders by
any such governmental entity against Borrower which have or may
have any such effect.
(g) Title to Properties. To the best of Borrower's knowledge,
Borrower has good and defensible title to the Collateral, free and
clear of all liens, encumbrances and defects of title, except for
liens, encumbrances and defects which do not have a material
adverse effect upon the value of the Collateral, taken as a whole.
(h) Place of Business. The chief executive office and principal
place of business of Borrower are located at the address of
Borrower set out in Section 7.03.
(i) Use of Proceeds. Borrower is not engaged principally, or as
one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulation U or X of the Board of Governors
of the Federal Reserve System), and no part of the proceeds of the
1995 Loan or the 1997 Loan will be used to purchase or carry any
such margin stock or to extend credit to any Person for the
purpose of purchasing or carrying any such margin stock.
Section 4.02. Representations by Norwest. Norwest hereby represents
that it will acquire the 1997 Note for its own account in the ordinary course
of its commercial banking business; however, the disposition of Norwest's
property shall at all times be and remain within its control and this section
does not prohibit Norwest's sale of the 1997 Note or of any participation in
the 1997 Note to any bank, financial institution or similar purchaser.
ARTICLE V
Covenants of Borrower
Section 5.01. Affirmative Covenants. Borrower warrants, covenants and
agrees that until the full and final payment of Borrower's obligations
hereunder and the termination of this Agreement, unless Norwest has previously
agreed otherwise in writing:
(a) Payment and Performance. Borrower will pay all amounts due
under the Loan Documents in accordance with the terms thereof and will in all
material respects observe, perform and comply with every covenant, term and
condition, express or implied, in the Loan Documents.
(b) Books. Financial Statements and Records. Borrower will at
all times maintain full and accurate books of account and records. Borrower
will maintain a standard system of accounting and will furnish the following
statements and reports to Norwest at Borrower's expense:
(1) as soon as available and in any event within 45 days after
the end of each of the first three quarters of each fiscal
year of Borrower, an unaudited balance sheet of Borrower as
at the end of such quarter and related statements of income,
retained earnings and cash flow of Borrower for such
quarterly period and for the fiscal year to date, in
reasonable detail and stating in comparative form the figures
for the corresponding periods in the previous year, all
prepared in accordance with generally accepted accounting
principles (Borrower's 10-Q report);
(2) as soon as available, and in any event within 120 days after
the end of each fiscal year of Borrower, a copy of the annual
audit report of Borrower, with the unqualified opinion of a
certified public accountant chosen by Borrower and acceptable
to Norwest, prepared in reasonable detail and in accordance
with generally accepted accounting principles, containing at
least a balance sheet as of the end of such fiscal year of
Borrower and a statement of income, retained earnings and
cash flow, setting forth in comparative form the
corresponding figures for the preceding fiscal year of
Borrower (Borrower's 10-K report);
(3) upon written or telephonic request from Norwest, a report in
form satisfactory to Norwest disclosing with respect to the
month of such request: (A) the amount of oil, gas, and other
hydrocarbon minerals produced from or allocated to each well
included in the Collateral; (B) the amount of such production
per well attributable to Borrower's interest; (C) the amount
of the actual proceeds from the sale of such oil, gas, and
other hydrocarbon minerals per well and the amount of such
proceeds attributable to Borrower's interest; (D) the amount
of Borrower's share of: (i) the actual costs and expenses
incurred to make such oil, gas and other hydrocarbon minerals
marketable and to transport the same to the point or points
of delivery to the purchaser, and (ii) production, severance
or other taxes required to be paid with respect to such
production and sale, and (E) the amount actually received by
Borrower from the sale of such oil, gas and other hydrocarbon
minerals per well; and
(4) annually (by March 1 of each year, commencing March 1, 1998)
until all of the Notes are paid in full and this Agreement
has been terminated, and at such other times as Norwest may
reasonably request, a report in form satisfactory to Norwest,
certified by an independent petroleum engineer satisfactory
to Norwest, setting forth the proven producing oil and gas
reserves attributable to Borrower's interest in the currently
producing wells on the Collateral, together with a forecast
of the rates of production therefrom and the estimated income
to Borrower from such production, calculated in a manner
satisfactory to Norwest, for the estimated economic life of
such properties.
(c) Other Information and Inspections. Borrower will furnish to
Norwest any information which Norwest may from time to time reasonably request
concerning any covenant, provision or condition of the Loan Documents or any
matter in connection with Borrower's business and operations and will permit
representatives appointed by Norwest to visit and inspect, upon reasonable
notice to Borrower and at their sole risk, any and all of such properties and
facilities, including Borrower' books of account, other books and records, and
any facilities or other business assets.
(d) Notice of Material Events. Borrower will promptly notify
Norwest: (1) of any material adverse change in the financial condition of, or
any material occurrence (including without limitation acceleration of Debts,
filing of suits or claims) with respect to, Borrower, (2) of the filing of any
suit or proceeding against Borrower (or the occurrence of any material
development in any such suit or proceeding) in which an adverse decision could
have a material adverse effect upon Borrower's financial condition, business
or operations (or could result in a judgment not covered by insurance of
$250,000 or more against Borrower), or (3) of the occurrence of any Event of
Default or of any event or condition which, with the giving of notice, the
lapse of time, or both, would constitute an Event of Default. Borrower will
also notify Norwest in writing at least twenty Business Days prior to the date
that Borrower changes its name or the location of its chief executive office
or principal place of business or the place where it keeps its books and
records concerning the Collateral, furnishing with such notice any necessary
financing statement amendments or requesting that Norwest prepare the same.
(e) Maintenance of Existence and Qualifications. Borrower will
maintain and preserve its corporate existence and its rights and franchises in
full force and effect and will qualify to do business as a foreign corporation
in all places where required by applicable law.
(f) Payment of Trade Debt, Taxes. etc. Borrower will: (1) timely
file all required tax returns; (2) timely pay all taxes, assessments, and
other governmental charges or levies imposed upon it or upon its income,
profits or property; and (3) timely pay all Debt owed by it on ordinary trade
terms to vendors, suppliers and other Persons providing goods and services
used by it in the ordinary course of its business. Borrower may, however,
delay paying or discharging any such Debt so long as it is in good faith
contesting the validity thereof by appropriate proceedings.
(g) Payment of Expenses. Borrower will promptly (and in any event
within 30 days after any invoice or other statement or notice) pay all
reasonable costs and expenses incurred by or on behalf of Norwest (including
attorneys' fees) in connection with: (1) the preparation, execution and
delivery of the Loan Documents (including without limitation any and all
future amendments or supplements thereto or restatements thereof), and any and
all consents, waivers or other documents or instruments relating thereto, (2)
the filing, recording, refiling and re-recording of any Security Documents and
any other documents or instruments or further assurances required to be filed
or recorded or refiled or re-recorded by the terms of any Loan Document, (3)
the examination of Borrower's title to the Collateral, and (4) the
enforcement, after the occurrence of a Default or an Event of Default, of the
Loan Documents.
(h) Compliance with Agreements and Law. Borrower will perform all
material obligations it is required to perform under the terms of each
indenture, mortgage, deed of trust, security agreement, lease, franchise,
agreement, contract or other instrument or obligation to which it is a party
or by which it or any of its properties is bound, in such a way that they
result in no material adverse effect upon the Collateral or Borrower's ability
to perform its obligations under this Agreement. Borrower will conduct its
business and affairs in compliance in all material respects with all laws,
regulations, and orders applicable thereto (including without limitation those
relating to pollution and other environmental matters).
(i) Additional Security Documents. Promptly after a request
therefor by Norwest at any time and from time to time, Borrower will execute
and deliver to Norwest such additional Security Documents and/or amendments to
existing Security Documents as Norwest may deem necessary or appropriate in
order to grant to Norwest a perfected lien on and security interest in
sufficient oil and/or gas interests owned by Borrower to maintain the
Borrowing Base at an amount greater than the aggregate outstanding principal
balances of the 1993 Revolver/Term Loan, the 1995 Loan and the 1997 Loan.
(j) Further Assurances. Borrower will execute and deliver such
other and further instruments and will do such other and further acts as may
be reasonably required by Norwest to be necessary or desirable to carry out
more effectively the purpose of this Agreement, including without limitation:
(1) prompt correction of any defect which may hereafter be discovered in the
title to the Collateral or in the execution and acknowledgement of this
Agreement, the Notes, the Security Documents or any other Loan Documents, and
(2) prompt execution and delivery of any division or transfer orders and other
documents which in the opinion of Norwest are needed to effectuate the
transfer to Norwest of the proceeds of production from the Collateral or any
part thereof, pursuant to the Security Documents.
(k) Current Ratio. Borrower will at all times maintain a Current
Ratio of not less than 1.25:1.00.
(l) Debt to Worth Ratio. Borrower will at all times maintain a
ratio of: (1) Borrower's Debt, to (2) the Tangible Net Worth of Borrower, of
not more than 1.50:1.00.
Section 5.02. Negative Covenants. Borrower warrants, covenants and
agrees that until the full and final payment of Borrower's obligations
hereunder and the termination of this Agreement, unless Norwest has previously
agreed otherwise in writing:
(a) Limitation on Liens. Borrower will not create, assume or
permit to exist any Lien upon any of the Collateral, whether now owned or
hereafter acquired, except: (1) Liens at any time existing in favor of
Norwest; and (2) statutory Liens for taxes, statutory or contractual
mechanics' and materialmen's Liens incurred in the ordinary course of
business, and other similar Liens incurred in the ordinary course of business;
provided that such Liens secure only Debt which is not delinquent.
(b) Additional Debt. Borrower will not create, incur, assume or
permit to exist Debt except: (1) the 1993 Revolver/Term Loan, the 1995 Loan
and the 1997 Loan; (2) trade debt owed to suppliers, pumpers, mechanics,
materialmen and others furnishing goods or services to Borrower in the
ordinary course of business; and (3) existing Debt heretofore disclosed by
Borrower to Norwest in writing.
(c) Limitation on Sales of Property. Borrower will not sell,
transfer, lease, exchange, alienate or dispose of any of the Collateral except
as follows (and the following exceptions shall be subject to any limitations
contained in the Security Documents): (1) equipment which is worthless or
obsolete, which is replaced by equipment of equal suitability and value or
which is salvaged from wells which have been plugged and abandoned by or on
behalf of Borrower; and (2) inventory (including oil and gas sold as produced)
which is sold in the ordinary course of business.
(d) Limitation on Credit Extensions. Borrower will not extend
credit, make advances or make loans other than: (1) normal and prudent
extensions of credit to customers buying goods and services in the ordinary
course of business, which extensions shall not be for longer periods than
those extended by similar businesses operated in a normal and prudent manner;
and (2) other extensions of credit, advances and loans which, when added to
the dollar amount of any assumptions, guaranties, endorsements and secondary
liabilities permitted to be outstanding under the provisions of Section
5.02(f) below, are in an amount not greater than $250,000.
(e) Reorganizations; Combinations. Borrower will not: (1) change
its name, its fiscal year or the nature of its business, (2) reorganize,
liquidate or dissolve, or (3) enter into any merger or other combination in
which it is not the surviving corporation.
(f) Limitation on Guarantees. Borrower will not assume,
guarantee, endorse or be or become secondarily liable for any Debt which is
the primary obligation of any other Person, other than assumptions,
guaranties, endorsements and secondary liabilities which, when added to the
dollar amount of any extensions of credit, advances and loans permitted to be
outstanding under the provisions of Section 5.02(d)(2) above, are in an amount
not greater than $250,000.
ARTICLE VI
Events of Default and Remedies
Section 6.01. Events of Default. Each of the following events
constitutes an Event of Default under this Agreement:
(a) Borrower fails to pay any interest on or principal of any of
the Notes (including without limitation any mandatory prepayment thereof) or
any fees hereunder when due and payable, and such failure is not remedied
within a period of 20 calendar days; or
(b) Borrower fails to pay any other indebtedness under this
Agreement or any of the Security Documents when due and payable, and such
failure is not remedied within a period of 20 calendar days; or
(c) Any "default" or "event of default," including the expiration
of any applicable period of grace, occurs under any Loan Document which
defines either term; or
(d) Any representation or warranty previously, presently or
hereafter made in writing by or on behalf of Borrower in connection with any
Loan Document shall prove to have been false or incorrect in any material
respect on any date on or as of which made; or
(e) Borrower fails to duly observe, perform or comply with any
covenant, agreement, condition or provision of this Agreement (except for
those specifically described elsewhere in this Article VI), and such failure
is not remedied within 30 days after Norwest gives notice to Borrower of such
failure; or
(f) Borrower: (1) commences a voluntary case under any applicable
bankruptcy, insolvency or similar law; (2) suffers the entry against it of a
judgment, decree or order for relief by a court of competent jurisdiction in
an involuntary proceeding commenced under any applicable bankruptcy,
insolvency or similar law; (3) suffers the appointment of a receiver,
custodian, trustee or similar official for a substantial part of its assets;
(4) makes a general assignment for the benefit of creditors; (5) fails
generally to pay (or admits in writing its inability to pay) its debts as such
debts become due; or (6) suffers the entry against it of a final judgment for
the payment of money in excess of $250,000 (not covered by insurance), unless
the same is discharged within 30 days after the date of entry thereof or an
appeal or appropriate proceeding for review thereof is taken within such
period and a stay of execution pending such appeal is obtained; or
(g) There occurs a material change in the management of Borrower
that Norwest determines, in its sole discretion, results in, or is likely to
result in, a change in the operation of the business of Borrower that may
adversely impact the collectability of Norwest's loans to Borrower, or
Borrower's ability to service such loans.
Upon the occurrence of an Event of Default described in subsection (f) of this
Section, the 1993 Revolver/Term Loan, the 1995 Loan and the 1997 Loan shall
thereupon be immediately due and payable, without presentment, demand,
protest, notice of protest, declaration or notice of acceleration or intention
to accelerate, or any other notice or declaration of any kind, all of which
are hereby expressly waived by Borrower. During the continuance of any other
Event of Default, Norwest at any time and from time to time (unless all Events
of Default have theretofore been remedied) may declare any or all of the 1993
Revolver/Term Loan, the 1995 Loan and the 1997 Loan immediately due and
payable, and the 1993 Revolver/Term Loan, the 1995 Loan and the 1997 Loan
shall thereupon be immediately due and payable.
Section 6.02. Remedies. If any Event of Default (or any event or
condition which, with the giving of notice, the lapse of time, or both, would
constitute an Event of Default) shall occur and be continuing, the obligation
of Norwest to make Advances under this Agreement shall terminate immediately.
If any Event of Default shall occur, Norwest may protect and enforce its
rights under the Loan Documents by any appropriate proceedings, including
proceedings for specific performance of any covenant or agreement contained in
any Loan Document, and Norwest may enforce the payment of Borrower's
obligations hereunder or enforce any other legal or equitable right. All
rights, remedies and powers conferred upon Norwest under the Loan Documents
shall be deemed cumulative and not exclusive of any other rights, remedies or
powers available under the Loan Documents or at law or in equity.
Section 6.03. Indemnity. Borrower hereby agrees to indemnify, defend
and hold harmless Norwest and its agents, affiliates, officers, directors and
employees from and against any and all claims, losses, demands, actions,
causes of action, and liabilities whatsoever (including without limitation
reasonable attorneys' fees and expenses, and costs and expenses reasonably
incurred in investigating, preparing or defending against any litigation or
claim, action, suit, proceeding or demand of any kind or character) arising
out of or resulting from: (a) the Loan Documents (including without
limitation the enforcement thereof), except to the extent such claims, losses,
and liabilities are proximately caused by a Norwest's gross negligence,
willful misconduct or breach of the Loan Documents, and (b) the contamination
of the Collateral by any hazardous substance or environmental pollutant in
violation of any federal, state or local environmental statute, rule,
regulation or ordinance, including without limitation violation of the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended from time to time, or of the Resource Conservation and Recovery Act,
as amended from time to time.
ARTICLE VII
Miscellaneous
Section 7.01. Waiver and Amendment. No failure or delay by Norwest in
exercising any right, power or remedy which it may have under any of the Loan
Documents shall operate as a waiver thereof. No waiver of any provision of
any Loan Document and no consent to any departure therefrom shall ever be
effective unless it is in writing and signed by Norwest. This Agreement and
the other Loan Documents set forth the entire understanding between the
parties hereto, and no modification or amendment of or supplement to this
Agreement or the other Loan Documents shall be valid or effective unless the
same is in writing and signed by the party against whom it is sought to be
enforced.
Section 7.02. Survival of Agreements; Cumulative Nature. All of
Borrower's various representations, warranties, covenants and agreements in
the Loan Documents shall survive until Borrower's obligations hereunder have
been paid in full.
Section 7.03. Notices. All notices, requests, consents, demands and
other communications required or permitted hereunder shall be in writing and
shall be deemed sufficiently given or furnished if delivered by personal
delivery, by expedited delivery service or by United States mail, postage
prepaid, at the addresses specified below (unless changed by similar notice in
writing given by the particular Person whose address is to be changed), and,
when so given, shall be deemed effective upon delivery:
Borrower's address: 1407 West Dakota Parkway
P.O. Box 1505
Williston, North Dakota 58801
Attention: Jeffrey P. Vickers
Norwest's address: 175 North 27th Street
Billings, Montana 59101
Attention: Douglas P. Kraft
Section 7.04. Parties in Interest. All grants, covenants and
agreements contained in the Loan Documents shall bind and inure to the benefit
of the parties thereto and their respective successors and assigns; provided
that Borrower may not assign or transfer any of its rights or delegate any of
its duties or obligations under any Loan Document without the prior consent of
Norwest.
Section 7.05. GOVERNING LAW. THE LOAN DOCUMENTS SHALL BE DEEMED
CONTRACTS AND INSTRUMENTS MADE UNDER THE LAWS OF THE STATE OF MONTANA AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF
THE STATE OF MONTANA AND THE LAWS OF THE UNITED STATES OF AMERICA, EXCEPT (A)
TO THE EXTENT THAT THE LAW OF ANOTHER JURISDICTION IS EXPRESSLY ELECTED IN A
LOAN DOCUMENT, AND (B) WITH RESPECT TO SPECIFIC LIENS, OR THE PERFECTION
THEREOF, EVIDENCED BY SECURITY DOCUMENTS COVERING REAL OR PERSONAL PROPERTY
WHICH BY THE LAWS APPLICABLE THERETO ARE REQUIRED TO BE CONSTRUED UNDER THE
LAWS OF ANOTHER JURISDICTION. BORROWER HEREBY IRREVOCABLY SUBMITS ITSELF TO
THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS OF THE STATE OF
MONTANA.
Section 7.06. Limitation on Interest. Norwest and Borrower intend to
contract in strict compliance with applicable usury laws from time to time in
effect. Norwest agrees to refund to Borrower any amounts paid by Borrower in
excess of the maximum rate under applicable usury laws.
Section 7.07. Severability. If any term or provision of any Loan
Document shall be determined to be illegal or unenforceable all other terms
and provisions of the Loan Documents shall nevertheless remain effective and
shall be enforced to the fullest extent permitted by applicable law.
Section 7.08. Counterparts. This Agreement may be separately executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to constitute one
and the same Agreement.
Section 7.09. Entire Agreement. This Agreement, the Notes, the
Security Documents and the other Loan Documents from time to time executed in
connection herewith state the entire agreement between the parties with
respect to the subject matter hereof. The terms and provisions of this
Agreement shall supersede the terms and provisions of the Prior Credit
Agreement in their entirety.
IN WITNESS WHEREOF, this Agreement is executed as of the date first
written above.
GEORESOURCES, INC.
By: /s/ J. P. Vickers
J. P. Vickers,
President
NORWEST BANK MONTANA, NATIONAL
ASSOCIATION
By: /s/ Douglas P. Kraft
Douglas P. Kraft
Vice President
EXHIBIT A
ALLONGE
THIS ALLONGE, dated as of December 5, 1997, is by and between
GEORESOURCES, INC., a Colorado corporation (herein called "Borrower"), and
NORWEST BANK MONTANA, NATIONAL ASSOCIATION, a national banking association
(herein called "Norwest"), successor in interest to NORWEST BANK BILLINGS,
NATIONAL ASSOCIATION.
Reference is made to Amended and Restated Secured Term Loan and
Revolving Credit Agreement dated as of December 5, 1997 (the "Agreement"),
between Borrower and Norwest.
As of the date hereof, the Promissory Note dated as of April 29, 1993
(the "Note"), made by Borrower, payable to the order of Norwest Bank Billings,
National Association, in the face amount of $1,000,000, shall be amended by
changing all references therein to the Amended and Restated Secured Term Loan
and Revolving Credit Agreement dated as of September 1, 1995, between Borrower
and Norwest, to be references to the Amended and Restated Secured Term Loan
and Revolving Credit Agreement dated as of December 5, 1997, between Borrower
and Norwest.
EXECUTED as of the date first above written.
GEORESOURCES, INC.
By: /s/ J. P. Vickers
President
NORWEST BANK MONTANA, NATIONAL
ASSOCIATION, successor in interest
to NORWEST BANK BILLINGS, NATIONAL
ASSOCIATION
By: /s/ Doug Kraft
Vice President
ALLONGE
THIS ALLONGE, dated as of December 5, 1997, is by and between
GEORESOURCES, INC., a Colorado corporation (herein called "Borrower"), and
NORWEST BANK MONTANA, NATIONAL ASSOCIATION, a national banking association
(herein called "Norwest"), successor in interest to NORWEST BANK BILLINGS,
NATIONAL ASSOCIATION.
Reference is made to Amended and Restated Secured Term Loan and
Revolving Credit Agreement dated as of December 5, 1997 (the "Agreement"),
between Borrower and Norwest.
As of the date hereof, the Promissory Note dated as of September 1, 1995
(the "Note"), made by Borrower, payable to the order of Norwest Bank Billings,
National Association, in the face amount of $1,000,000, shall be amended as
follows:
1. By changing all references therein to the Amended and Restated
Secured Term Loan and Revolving Credit Agreement dated as of September 1,
1995, between Borrower and Norwest, to be references to the Amended and
Restated Secured Term Loan and Revolving Credit Agreement dated as of December
5, 1997, between Borrower and Norwest; and
2. By changing the maturity date of the Note, as set forth in line 4 of
the third paragraph on page 1 of the Note, from "September 5 2002" to
"December 5, 2001".
EXECUTED as of the date first above written.
GEORESOURCES, INC.
By: /s/ J. P. Vickers
President
NORWEST BANK MONTANA, NATIONAL
ASSOCIATION, successor in interest
to NORWEST BANK BILLINGS, NATIONAL
ASSOCIATION
By: /s/ Douglas P. Kraft
Vice President
EXHIBIT C
PROMISSORY NOTE
$3,000,000 December 5, 1997
Billings, Montana
FOR VALUE RECEIVED, GEORESOURCES, INC., a Colorado corporation
("Borrower"), promises to pay to the order of NORWEST BANK MONTANA, NATIONAL
ASSOCIATION ("Payee"), the principal sum of $3,000,000, or such lesser amount
as may be borrowed hereunder, together with interest on the outstanding unpaid
balance of such principal amount at the rate provided below.
This Note is issued pursuant to, and is subject to the terms and
provisions of, the Amended and Restated Secured Term Loan and Revolving Credit
Agreement (the "Credit Agreement"), dated as of December 5, 1997, between
Borrower and Payee. Except as otherwise defined herein, terms defined in the
Credit Agreement shall have the same meanings when used herein.
The outstanding principal amount of this Note shall be payable as
provided in the Credit Agreement. The entire outstanding principal balance of
this Note shall be due and payable on January 5, 2005 (unless payable sooner
pursuant to the terms of the Credit Agreement) and shall bear interest
initially at the fluctuating rate, adjustable the day of any change, equal to
the annual rate publicly announced or published from time to time by Norwest
Bank Minnesota, National Association as its "base" or "prime" rate, which may
not be the lowest interest rate charged by Payee (the "Base Rate"), plus
three-quarters of one percentage point per annum.
Interest shall accrue daily, shall be payable on the fifth day of each
month, commencing January 5, 1998, and at the maturity of this Note.
All payments of principal and interest hereon shall be made at Payee's
offices at 175 North 27th Street, Billings, Montana 59101 (or at such other
place as Payee shall have designated to Borrower in writing) on the date due
in immediately available funds and without set-off or counterclaim or
deduction of any kind. All payments received hereunder shall be applied first
to costs of collection, second to accrued interest as of the date of payment
and third to the outstanding principal balance of this Note.
This Note is secured by, and the holder of this Note is entitled to the
benefits of, the documents described in the Credit Agreement (the "Security
Documents"). Reference is made to the Security Documents for a description of
the property covered thereby and the rights, remedies and obligations of the
holder hereof in respect thereto.
Subject to the expiration of any applicable period of grace provided for
in the Credit Agreement, in the event of (a) any default in any payment of the
principal of or interest on this Note when due and payable, or (b) any other
Event of Default (as defined in the Credit Agreement), then the whole
principal sum of this Note plus accrued interest and all other obligations of
Borrower to holder, direct or indirect, absolute or contingent, now existing
or hereafter arising, shall, at the option of Payee, become immediately due
and payable, and any or all of the rights and remedies provided herein and in
the Credit Agreement and the Security Documents, as they may be amended,
modified or supplemented from time to time may be exercised by Payee.
If Borrower fails to pay any amount due under this Note and Payee has to
take any action to collect the amount due or to exercise its rights under the
Security Documents, including without limitation retaining attorneys for
collection of this Note, or if any suit or proceeding is brought for the
recovery of all or any part of or for protection of the indebtedness or to
foreclose the Security Documents or to enforce Payee's rights under the
Security Documents, then Borrower agrees to pay on demand all reasonable costs
and expenses of any such action to collect, suit or proceeding, or any appeal
of any such suit or proceeding, incurred by Payee, including without
limitation the reasonable fees and disbursements of Payee's attorneys and
their staff.
Borrower waives presentment, notice of dishonor and protest, and assents
to any extension of time with respect to any payment due under this Note, to
any substitution or release of collateral and to the addition or release of
any party, except as provided in the Credit Agreement. No waiver of any
payment or other right under this Note shall operate as a waiver of any other
payment or right.
If any provision in this Note shall be held invalid, illegal or
unenforceable in any jurisdiction, the validity, legality or enforceability of
any defective provisions shall not be in any way affected or impaired in any
other jurisdiction.
No delay or failure of the holder of this Note in the exercise of any
right or remedy provided for hereunder shall be deemed a waiver of such right
by the holder hereof, and no exercise of any right or remedy shall be deemed a
waiver of any other right or remedy that the holder may have.
All notices given hereunder shall be given as provided in the Credit
Agreement.
This Note is to be governed by and construed according to the laws of
the State of Montana.
GEORESOURCES, INC.
By: ________________________
J. P. Vickers, President
EXHIBIT D
CERTIFICATE RE RESOLUTIONS AND
ARTICLES OF INCORPORATION AND BYLAWS
The undersigned, Cathy Callahan Kruse, Secretary/Treasurer of
GeoResources, Inc. (the "Company"), a Colorado corporation, hereby certifies
that:
1. Attached hereto is a true and complete copy of certain
Resolutions duly adopted by the Board of Directors of the Company as in effect
on the date hereof.
2. Except for any amendments attached hereto, the copies of the
Articles of Incorporation and the Bylaws of the Company attached to my
certificate dated September 1, 1995 are true and complete copies of the
Articles of Incorporation and the Bylaws of the Company as in effect on the
date hereof.
3. The following persons are duly authorized to execute Loan
Documents (as defined in the Amended and Restated Secured Term Loan and
Revolving Credit Agreement (the "Credit Agreement"), dated as of December 5,
1997, between the Company and Norwest Bank Montana, National Association) on
behalf of the Company:
Name and Specimen
Capacity Signature
J. P. Vickers __________________
President J. P. Vickers
Executed by the undersigned as of the 5th day of December, 1997.
Cathy Callahan Kruse
EXHIBIT E
BORROWING BASE CALCULATION
GEORESOURCES, INC.
Dated _____________________
1. Present Worth (PW) of Proved Developed
Producing (PDP) Oil and Gas Properties
Discounted At __________. _______________
2. Less: a) PW of PDP Properties Not
Mortgaged to Norwest. -______________
b) PW of The Next 12 Months of
Production (Subtracted Only
if Borrower Has A Revolving
Line Related To Oil and Gas). -______________
c) Other Ineligible Properties -______________
3. Net PW of PDP =______________
4. Borrowing Base Factor x .50
=______________
5. Plus: a) Anticipated Principal
Amortization of Oil and Gas
Related Term Debt In The Next
12 Months (Added Only If A
Dollar Amount Has Been
Subtracted in 2b). +______________
6. Borrowing Base =______________
7. Less: Principal Balance of all
Revolving and Term Debt
Related To Oil and Gas -______________
8. Margin (Deficit) =______________
CERTIFICATE RE RES0LUTIONS AND
ARTICLES OF INCORPORATION AND BYLAWS
The undersigned, Cathy Callahan Kruse, Secretary/Treasurer of
GeoResources, Inc. (the "Company"), a Colorado corporation, hereby certifies
that:
1. Attached hereto is a true and complete copy of certain
Resolutions duly adopted by the Board of Directors of the Company as in effect
on the date hereof.
2. Except for any amendments attached hereto, the copies of the
Articles of Incorporation and the Bylaws of the Company attached to my
certificate dated September 1, 1995 are true and complete copies of the
Articles of Incorporation and the Bylaws of the Company as in effect on the
date hereof.
3. The following persons are duly authorized to execute Loan
Documents (as defined in the Amended and Restated Secured Term Loan and
Revolving Credit Agreement (the "Credit Agreement"), dated as of December 5,
1997, between the Company and Norwest Bank Montana, National Association) on
behalf of the Company:
Name and Specimen
Capacity Signature
J. P. Vickers /s/ J. P. Vickers
President J. P. Vickers
President
Executed by the undersigned as of the 5th day of December, 1997.
/s/ Cathy Callahan Kruse
Cathy Callahan Kruse
Sec./Treas
RESOLVED, that the officers of the Corporation are hereby authorized to
undertake all actions necessary to establish a $3,000,000 revolving line-of-
credit with Norwest Bank Montana, under essentially the same terms as the
Company's 1995 Revolving Credit Agreement.
FURTHER RESOLVED, that during the term of this line-of-credit, the management
of the Company is authorized to make individual Williston Basin oil and gas
acquisitions or perform drilling projects that do not require more than
$25O,000 of borrowings from this line-of-credit for each acquisition or
drilling project.
SECOND AMENDMENT OF AND ADDENDUM TO MORTGAGE, SECURITY AGREEMENT,
ASSIGNMENT OF PRODUCTION AND FINANCING STATEMENT
AND MORTGAGE - COLLATERAL REAL ESTATE MORTGAGE
THIS SECOND AMENDMENT OF AND ADDENDUM TO MORTGAGE, SECURITY AGREEMENT,
ASSIGNMENT OF PRODUCTION AND FINANCING STATEMENT AND MORTGAGE - COLLATERAL
REAL ESTATE MORTGAGE (this "Instrument"), dated as of December 5, 1997, is
between GEORESOURCES, INC., a Colorado corporation (Federal Tax I.D. No. 84-
0505444) ("Mortgagor"), with an address at 1407 West Dakota Parkway, Suite 1B,
Williston, North Dakota 58801 (residence: Williams County, North Dakota), and
NORWEST BANK MONTANA, NATIONAL ASSOCIATION, a national banking association
("Lender"), successor in interest to NORWEST BANK BILLINGS, NATIONAL
ASSOCIATION, with an address at 175 North 27th Street, Billings, Montana
59117.
RECITALS
A. Mortgagor executed and delivered to Lender a Mortgage, Security
Agreement, Assignment of Production and Financing Statement dated as of April
29, 1993 (the "Original Mortgage"), the terms and provisions of which and the
description of the real and personal property covered by which are hereby
incorporated herein by this reference. The Original Mortgage was filed and
recorded, among other places, as follows:
Recording Data
State County Filing Date Book Page
Montana Richland 05/10/93 B-140 Mort. 871
North Dakota Bottineau 05/10/93 246 Mtges. 501
North Dakota McKenzie 05/10/93 Doc. #316744
North Dakota Renville 05/13/93 155 Mtgs. 261
North Dakota Williams 05/12/93 Doc. #549527
B. Mortgagor and Lender executed and delivered a First Amendment of
Mortgage, Security Agreement, Assignment of Production and Financing Statement
dated as of September 1, 1995 (the "First Amendment"), the terms and
provisions of which and the description of the real and personal property
covered by which are hereby incorporated herein by this reference. The First
Amendment was filed and recorded as follows:
Recording Data
State County Filing Date Book Page
Montana Richland 11/27/95 B-147 Mort. 993
North Dakota Bottineau 11/27/95 256 Mtgs. 158
North Dakota McKenzie 11/27/95 Doc. #323766
North Dakota Renville 11/28/95 158 Mtgs. 478
North Dakota Williams 11/27/95 Doc. #562428
C. Unless otherwise defined herein, terms defined in the Original
Mortgage, as amended by the First Amendment (the "Mortgage"), shall have the
same meanings when used herein. The counterparts hereof to be recorded in the
counties listed in Recital A above shall have attached thereto as Schedule I a
description of the land covered by the Mortgage.
D. In accordance with North Dakota Century Code, Section 35-03-17,
Lender and Mortgagor wish to file this Instrument in order to give notice that
the Mortgage and the liens, security interests and other rights granted
pursuant thereto remain in full force and effect.
E. The parties wish to amend the Mortgage as described
EXTENSION
In accordance with North Dakota Century Code, Section 35-03-17, Lender
and Mortgagor hereby give notice that the Mortgage and the liens, security
interests and other rights granted pursuant thereto remain in full force and
effect. The Mortgage and the liens, security interests and other rights
granted pursuant thereto are hereby ratified and confirmed.
AMENDMENT
IN CONSIDERATION of the sum of ten dollars ($10.00) in hand paid by
Lender to Mortgagor and of the mutual promises contained herein, and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereby agree that the Mortgage shall be
amended by substituting the following for Clauses (A), (B) and (C) of the
second paragraph on the page numbered 3 of the Mortgage:
(A) the payment of the Promissory Note dated September 1, 1995,
executed by Mortgagor, payable to the order of Mortgagee, in the
face amount of $1,000,000, as now in effect or as hereafter
amended, extended or replaced (the "1995 Note"), having a maturity
date of December 5, 2001, with interest at an annual rate equal to
the sum of the fluctuating annual rate announced from time to time
by Norwest Bank Minnesota, National Association ("NBM") as its
prime or base rate (currently, 8.5 percent per annum), which may
not be the lowest interest rate charged by NBM (the "Base Rate")
plus one percentage point; (B) the payment of the Promissory Note
dated April 29, 1993, executed by Mortgagor, payable to the order
of Mortgagee, in the face amount of $1,000,000, as now in effect
or as hereafter amended, extended or replaced (the "1993 Note"),
having a maturity date of September 5, 1999, with interest at an
annual rate equal to the sum of the Base Rate plus one percentage
point; and (C) the payment of the Promissory Note dated December
5, 1997, executed by Mortgagor, payable to the order of Mortgagee,
in the face amount of $3,000,000, as now in effect or as hereafter
amended, extended or replaced (the "1997 Note"), having a maturity
date of January 5, 2005, with interest at an annual rate equal to
the sum of the Base Rate plus three-quarters of one percentage
point (the 1995 Note, the 1993 Note and the 1997 Note collectively
referred to herein as the "Notes");
GRANT
Mortgagor hereby grants, bargains, sells, assigns, transfers, pledges,
mortgages and conveys, and grants a security interest in, the Mortgaged
Properties to Lender, WITH POWER OF SALE; TO HAVE AND TO HOLD the Mortgaged
Properties to Lender and its successors and assigns forever, subject to all of
the terms, conditions, covenants and agreements set forth in the Mortgage, as
amended hereby, for the security and benefit of Lender and its successors and
assigns as holder of any and all notes and other obligations secured by the
Mortgage, as amended hereby.
MISCELLANEOUS
This Instrument shall bind and inure to the benefit of the respective
successors and assigns of Mortgagor and Lender, including without limitation
any and all other banks, lending institutions and parties which may
participate in the indebtedness evidenced by the Indebtedness or any of it.
Notwithstanding any other provision contained herein, if any property interest
granted by this Instrument does not vest on the execution and delivery of this
Instrument, it shall vest, if at all, no later than 20 years after the
execution and delivery of this Instrument. Mortgagor hereby ratifies,
confirms and adopts the Mortgage, as amended hereby.
EXECUTED as of the date first above written.
ATTEST: GEORESOURCES, INC.
/s/ Cathy Kruse, By: /s/ J. P. Vickers
Cathy Kruse J. P. Vickers
Secretary President
(SEAL)
NORWEST BANK MONTANA, NATIONAL
ASSOCIATION, successor in interest
to NORWEST BANK BILLINGS, NATIONAL
ATTEST: ASSOCIATION
/s/ STACY ELLAND By: /s/ Doug Kraft
STACY ELLAND Doug Kraft
BSR Vice President
(SEAL)
STATE OF North Dakota )
) ss.
COUNTY OF Williams )
(Montana)
On this day before me, the undersigned notary public, personally
appeared J. P. Vickers, known to me to be the President of GEORESOURCES, INC.,
a Colorado corporation, the corporation that executed the within instrument,
and acknowledged to me that such corporation executed the same. Witness my
hand and official seal as of December __, 1997.
(North Dakota)
The foregoing instrument was acknowledged before me this 23 day of
December, 1997, by J. P. Vickers, as President of GEORESOURCES, INC., a
Colorado corporation, on behalf of said corporation. Witness my hand and
official seal.
/s/ Mary B. Mahar
Notary Public
Residing in: Williston, ND
My commission expires: September 5, 2003
STATE OF Montana )
) ss.
COUNTY OF Yellowstone )
(Montana)
On this day before me, the undersigned notary public, personally appeared
Doug Kraft, known to me to be the Vice President of NORWEST BANK
MONTANA, NATIONAL ASSOCIATION, a national banking association, successor in
interest to NORWEST BANK BILLINGS, NATIONAL ASSOCIATION, the national banking
association that executed the within instrument, and acknowledged to me that
such national banking association executed the same. Witness my hand and
official seal as of December 24, 1997.
(North Dakota)
The foregoing instrument was acknowledged before me this day of
December, 1997, by Doug Kraft, Vice President of NORWEST BANK MONTANA,
NATIONAL ASSOCIATION, a national banking association, successor in interest to
NORWEST BANK BILLINGS, NATIONAL ASSOCIATION, on behalf of said national
banking association. Witness my hand and official seal.
/s/ Shirley A. Esser
Notary Public
Residing in: Billings, MT
My commission expires: July 30, 2000
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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0
0
<COMMON> 40,972
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